LLC or Sole Proprietorship?

[tigerbob]

I'm going to be starting a business making custom hardwood furniture, and I'm currently mulling over my options in terms of what form the business should take.

Limited Liability Company (LLC)
Sole Proprietor (SP)

Of course, I'll be talking to an accountant about this, but was wondering whether others might have experience in this area so I have as much background info as possible before taking professional advice.

A bit of background...

The business will require at least $10-$15k initial capital investment in machinery. In addition, I will probably need to rent some commercial space to use as a workshop, so figure between $200 and $400 a month for this.

I have not yet investigated the cost of business liability insurance. This seems to be one of the major considerations before going with an LLC or SP. If a joint on a piece of furniture fails and someone is injured as a result, I could be liable. My wife and I have significant personal assets (house, vehicles, investment portfolio) that could be pursued, and I of course want to protect us from that possibility. However, the cost of insurance could be several hundred dollars a month which, added to the cost of shop space, puts me several hundred bucks in the red before I even start. I prefer the idea of going with SP rather than LLC purely from a simplicity standpoint, but this liability thing is a real issue. No country in the world sues quite as happily or readily as America.

As I am starting up a business, I will need to develop a line of furniture and a website. In total this could take up to a year, so I am thinking that as a worst case scenario I will spend up to 12 months making speculative pieces to allow me to market myself. Let's say for the sake of argument that I do not have any paying clients during this time.

As I understand it, I can choose "Flow Through" or "Entity" taxation with an LLC, but only "Flow Through" as a SP.

The following are major questions I am asking myself....

- If my wife is working (not for me), what is the best way to allow me to offset the tax she pays from her salary against the initial losses incurred by the business? I gather I can share ownership of an SP with her, whether she and I file jointly or separately.
- What is the best structure to allow me to depreciate the initial CapEx over a number of years, seeing as in the first year the business will possibly not have an income?
- Does it make sense to form a SP for the first year, and then potentially switch to an LLC later? This is particularly relevant in future where I may want to leave some income in the business as retained profits, rather than have these profits included on my personal return.

I could go on with other questions, but those are the main ones for right now.

Any insights much appreciated.

 

[Ravi]

You should also consider becoming an Scorp. I'd avoid the SP because you want to be protected from losing your house.

Here's a nice little description of the differences between an LLC and an Scorp.

S Corporation vs. LLC: Which Structure is Right for Your Business

You can write off $250,000 worth of capital expenditures without depreciating them each year, btw.

 

[DavidS]

S corp. S corp. S corp. S corp.

 

[Procrustes Stretched]

Of course an LLC for a small biz for reason ravi gave. Things will always depend on the state you live in, because when moved out here to CA I found out they have a differing tax structure for LLCs in this state. There are federal rules and then there are state rules. Look up the state structure for Michigan:
Forming an LLC in Michigan | Citizen Media Law Project

 

[tigerbob]

S corp. S corp. S corp. S corp.

I've looked at S Corp and while it does appear to offer tax advantages I don't want to be bogged down in paperwork and IRS semantics.

I'm leaning towards LLC.

 

[tigerbob]

You should also consider becoming an Scorp. I'd avoid the SP because you want to be protected from losing your house.

Here's a nice little description of the differences between an LLC and an Scorp.

S Corporation vs. LLC: Which Structure is Right for Your Business

You can write off $250,000 worth of capital expenditures without depreciating them each year, btw.

Great link. Thanks. Significantly less long winded that the other reference material I've been looking at.

 

[Procrustes Stretched]

You should also consider becoming an Scorp. I'd avoid the SP because you want to be protected from losing your house.

Here's a nice little description of the differences between an LLC and an Scorp.

S Corporation vs. LLC: Which Structure is Right for Your Business

You can write off $250,000 worth of capital expenditures without depreciating them each year, btw.

Great link. Thanks. Significantly less long winded that the other reference material I've been looking at.

make sure you check out the state rules for taxes and liabilities and roles of partners and more... will you be a one man show? are there advantages to redoing a LLC to include another so you have a partner? be creative.

 

[tigerbob]

You should also consider becoming an Scorp. I'd avoid the SP because you want to be protected from losing your house.

Here's a nice little description of the differences between an LLC and an Scorp.

S Corporation vs. LLC: Which Structure is Right for Your Business

You can write off $250,000 worth of capital expenditures without depreciating them each year, btw.

Great link. Thanks. Significantly less long winded that the other reference material I've been looking at.

make sure you check out the state rules for taxes and liabilities and roles of partners and more... will you be a one man show? are there advantages to redoing a LLC to include another so you have a partner? be creative.

Actually, I'm wading my way through that link you sent at present. Some good stuff in there (been reading it on and off now for over an hour). Yes, I'll likely be a one man show - the last thing I want is dealing with pain in the ass employees (like I was!).

 

[Amanda]

Anything but SP, srsly. The ease of start up isn't worth the liability.

 

[Ravi]

Great link. Thanks. Significantly less long winded that the other reference material I've been looking at.

make sure you check out the state rules for taxes and liabilities and roles of partners and more... will you be a one man show? are there advantages to redoing a LLC to include another so you have a partner? be creative.

Actually, I'm wading my way through that link you sent at present. Some good stuff in there (been reading it on and off now for over an hour). Yes, I'll likely be a one man show - the last thing I want is dealing with pain in the ass employees (like I was!).

One good thing about an Scorp (and this may be true of LLCs but you'd have to check) is that you can hire your minor children...my kids have been on the payroll since they were 8 or 9 doing filing, little chores, etc...write off for me, college fund for them. You have to follow some rules...what hours they're allowed to work, etc...but it's a pretty sweet deal.

 

[Procrustes Stretched]

make sure you check out the state rules for taxes and liabilities and roles of partners and more... will you be a one man show? are there advantages to redoing a LLC to include another so you have a partner? be creative.

Actually, I'm wading my way through that link you sent at present. Some good stuff in there (been reading it on and off now for over an hour). Yes, I'll likely be a one man show - the last thing I want is dealing with pain in the ass employees (like I was!).

One good thing about an Scorp (and this may be true of LLCs but you'd have to check) is that you can hire your minor children...my kids have been on the payroll since they were 8 or 9 doing filing, little chores, etc...write off for me, college fund for them. You have to follow some rules...what hours they're allowed to work, etc...but it's a pretty sweet deal.

that is why I said check state rules regs....it may be creative to add others such as family.

btw, good move on your part. I don't know why they all say you're so dumb.

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love the sig: Pauli, stanch libertarian and believer that the government should help no one: "so I took a student loan and enrolled in school to learn a new career"

...because I am always pointing out that Libertarians have no true principles that stand up in the real world or their own.

 

[Tech_Esq]

Your choice is really between S Corp and LLC. The SP is a non-starter in this day and age.

I ended up going with S Corp. There are some benefits your accountant can explain to you tax-wise. I thought I was going LLC until 5 minutes into the conversation with my tax adviser.

 

[Procrustes Stretched]

I say thanx because every case should be viewed individually and you were smart enough to listen to a pro in your area, and offer another option.

 

[tigerbob]

Your choice is really between S Corp and LLC. The SP is a non-starter in this day and age.

I ended up going with S Corp. There are some benefits your accountant can explain to you tax-wise. I thought I was going LLC until 5 minutes into the conversation with my tax adviser.

That's interesting. I've heard it said that accountants are more apt to recommend an S Corp than an LLC since LLC is fairly paperwork-light and an S Corp requires significantly more financial / tax law savvy (both things that an accountant will be more than happy to help you with and bill you for). You appear happy with your decision, so I guess for you it was the best choice. For my part, the only thing I hate more than doing financial paperwork myself is paying someone to do financial paperwork for me.

 

[manu1959]

was a c corp....stupid senior partners.....now an s corp.....as for liability.....have a limitation of liabilty written into your purchase agreements......if you are selling pieces for 5k....being sued for millions is not reasonable......also when you give pieces away i would still have a signed purchase agreement with the amount payable as zero.....

 

[William Joyce]

If a joint on a piece of furniture fails and someone is injured as a result, I could be liable. My wife and I have significant personal assets (house, vehicles, investment portfolio) that could be pursued, and I of course want to protect us from that possibility. However, the cost of insurance could be several hundred dollars a month which, added to the cost of shop space, puts me several hundred bucks in the red before I even start. I prefer the idea of going with SP rather than LLC purely from a simplicity standpoint, but this liability thing is a real issue. No country in the world sues quite as happily or readily as America.

It's a problem, eh?

I am sorry to say, but practically everyone who attempts to do business in America gets sued for one reason or another. Product liability is a big one. You are right... chances are good that some 300-pound person will sit on your chair, bust it, then sue the daylights out of you for a 'faulty' product, claiming 'bulging discs' or 'fibromyalgia' or some complete bullshit 'injury.'

The fact that such a lawsuit might have no merit is beside the point. I have clients all day long who say, "But we didn't do anything wrong." I know, you didn't. But that doesn't matter. Even if we "win" the lawsuit, it'll still cost thousands to defend. And even if you weren't at fault, a sympathetic jury could still award millions. From the minute you get served with papers, it's a money-suck of epic proportions, either for you or your insurance carrier.

So, I'd recommend the insurance. Incorporation is definitely protection for your personal assets, but insurance is better. To pay for it, of course, you'll just have to set prices accordingly.

And people wonder how lawsuits filed by others against 'heartless corporations' cost the rest of millions!

 

[Paulie]

S corp. S corp. S corp. S corp.

I've looked at S Corp and while it does appear to offer tax advantages I don't want to be bogged down in paperwork and IRS semantics.

I'm leaning towards LLC.

This is usually the biggest reason people go with LLC. You're protected, but still get to enjoy a lot of the advantages of a SP, such as light paperwork and no double taxation.

With LLC, I believe the business dies with you, just like a SP.

 

[American Horse]

I'm going to be starting a business making custom hardwood furniture, and I'm currently mulling over my options in terms of what form the business should take.

Limited Liability Company (LLC)
Sole Proprietor (SP)

Of course, I'll be talking to an accountant about this, but was wondering whether others might have experience in this area so I have as much background info as possible before taking professional advice.

I'd make sure I was talking to a CPA of some years of exprerience, preferably one who has a small office, and does work for others in your area with similar small businesses. He or she will answer all your questions about taxation issues. The CPA will most likely not give you any business advice, because that is not what they do.

The business will require at least $10-$15k initial capital investment in machinery. In addition, I will probably need to rent some commercial space to use as a workshop, so figure between $200 and $400 a month for this.

You seem to be wanting to start with a very low budget. Might you be able to operate from your garage or an outbuilding until you are sure things are going to work out in your marketing/business plan?

I have not yet investigated the cost of business liability insurance. This seems to be one of the major considerations before going with an LLC or SP. However, the cost of insurance could be several hundred dollars a month which, added to the cost of shop space, puts me several hundred bucks in the red before I even start.

You should be talking to a commercial insurance agency; some one who can deal with several insurance companies; that consult will be free. You're about right at $1,200 per year for liability insurance, because that is a minimum set by companies just to mess with such a small package. Once you have an employee you'll need Work Comp Ins. and that will more than double the liability insurance. I could always find enough money for WC for my employees, but never enough to insure myself. Getting insurance certificates from all who provide services for you will limit those costs as your business grows. In your type of business the cost of liability insurance is likely to be very low; highest at the start and lower as time goes on as it will be calculated on a percentage of your gross sales. Your WC insurancer will be based on projected wages paid of whatever type (W-2, or Casual labor (no witholding) or Subcontrated (no withoulding) with mandatory annual audits by the insurance companies auditors. This is a virtual certainty.

As I understand it, I can choose "Flow Through" or "Entity" taxation with an LLC, but only "Flow Through" as a SP.

I've spent almost 40 years as a SP, and only the liability aspect makes me wonder if I made the right choice.

The following are major questions I am asking myself....

- If my wife is working (not for me), what is the best way to allow me to offset the tax she pays from her salary against the initial losses incurred by the business? I gather I can share ownership of an SP with her, whether she and I file jointly or separately.

- What is the best structure to allow me to depreciate the initial CapEx over a number of years, seeing as in the first year the business will possibly not have an income?

These are technical tax questions too nuanced in your own situation to be much gone into here. You should pay a CPA (who fits the profile above) a fixed consult fee to answer if they are going to help determine whether or not you go ahead with your business plan.

- Does it make sense to form a SP for the first year, and then potentially switch to an LLC later?

I have built houses and developed land since 1970. I have never once been sued, even in small claims court. Still I concern myself with statute of limitations for certain liabilities because of changing legislation and building codes, and toxic or environment issues that are ever evolving. If I had done one thing differently I might have created an LLC once my business had gotten larger.

Good luck!
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