I am getting ready to start my own 1 man shop, and am looking at the various options of simple ownership, Limited Liability (LLC) and Corp (INC).
what is the differance in price to get one or the other of these set up and other than the limiting liability to the company assets, what is the benefit of one over the other?
1 – measure the board twice, 2 – cut it once, 3 – measure the space where it is supposed to go 4 – get a new board and go back to step 1
Replies
I'll give you the standard "ask your accountant/attorney."
I do mostly field work as a carpenter, but I started out as a sole proprietor. If I recall it was about $60-$100 to register a fictitious name through the state of PA. That's all you need to open a bank account, and get liability insurance in your business name. Basically, you would still use your SSN, and you are the buisness.
Recently(Jan 1, 2005) I started operating as a LLC. The main reason was liability concerns involved with remodeling projects, and employees. Now, instead of my SSN I use a Federal Identification Number(FIN). I use the FIN for banking, credit, and insurance purposes. This just gives a little(depending on your state law) separation between me and the business. Theoretically, if I were ever sued by a customer, or employee, my personal assets would be protected. I'm not convinced they are, but at least it's something. Cost $500 for my accountant to do the paperwork involved, and $125 to the state for a one time fee.
LLC is not the same as a corporation. LLC was created as a more cost affective alternative to a corporation. Corporations, as a rule, create lots of paperwork, and have lots of fees involved.
Edited 8/16/2005 1:25 pm ET by dustinf
Thanks for the info - that was mostly what I was looking for I think.
I will be making items for sale, not working in other peoples houses or having any employees (at least for the forseeable future), and will be working out of my garage. I had figured the corp route was going to be very expensive and require a lot of paperwork and had mostly ruled that out. It then came down in my mind between LLC and sole prop. and was wondering if in this instance there would be a need for the LLC or if I could forego that until the situation changed where it might be required.
I would like to keep as much of my assets as possible for use in setting up the business itself and not in making lawyers richer.1 - measure the board twice, 2 - cut it once, 3 - measure the space where it is supposed to go 4 - get a new board and go back to step 1
Find your local Small buisiness Development Center (or the equivelent). These type orginizations are free and very helpfull. I chose an LLC. suits me very well. It is hard to imagine an argument for any thing else for a small business of this type. Although remaining a DBA does have some advantages.
MIke
DBA?1 - measure the board twice, 2 - cut it once, 3 - measure the space where it is supposed to go 4 - get a new board and go back to step 1
Doing Business As=Sole proprietor
DBA is not exactly the same thing as a sole proprietor.
A sole proprietor can have a Doing Business As (or many of them) but so can a corporation. In some states, this is called a "ficticious name" or "trade name." It varies state by state. In some states the vendor's license and DBA are combined onto one form. One purpose if someone has to do some business or legal issues with John's Cabinet Shop, they can contact the Secretary of State and locate that legal entity.
You can call yourself, John Doe, Cabinetmaker, but any other name you have to file.
Example John Doe, D/B/A John's Cabinet Shop
Acme Enterprises, Inc, DBA John's Cabinet Shop
Other than going into business, this should be one of the first decisions you make, what legal form your enterprise will be. Everything else keys off it.
Talk to an Lawyer/Accountant. They will give you much better advice than we will.
Having got that out of the way, Consider starting a corporation. There are a good number of tax benefits to using a Corp. over LLC. You really don't want to consider a Sole Proprietor. It leaves you completely unprotected if a customer decides to sue you. A Corportation offers the best protection of your personal assets along with tax benefits. The downside is, it cost more to start.
For more information try the book "Own Your Own Corporation: Why the Rich Own Their Own Companies and Everyone Else Works for Them". It's part of the Rich Dad series. (Actually, consider reading "Rich Dad, Poor Dad" too.
THere are lots of advantages to owning your own company (sole prop. or other forms). Any expense you have related to the business affects your taxes (in a good way).Here's a situation I'm aware of that is perfectly legal....A guy's wife is a nurse practitioner (sole prop. she is paid and gets 1099s from the practice she works in). This NP has one employee, her spouse. He does her books. Her company policy is to reimburse all healthcare expenses of *any* employee. She then deducts those employee expenses from her business income at tax time. She "pays" the guy about $1200 a year for his services (book keeping, keep you mind out of the gutter) and pays his SS taxes.Don't ask me how well I know this guy and his wife. ;-)MarkVisit my woodworking blog Dust Maker
If you are near a larger metro area, call your IRS office to see what classes/seminars they offer. When I took the first steps, the IRS offered a day long seminar on the types of businesses, and their pros and cons. Info on liability, and asset conservation, with no hearsay or axes to grind. Straight from the horse's mouth, so to speak. Very informative, free, and our group was about 8 people to one very qualified tax expert. All the Q&A you could want. In my area they offer this class monthly, with other classes available also. All free.
The hardest part is making your feet turn and voluntarily walk in through the IRS doorway.
Dave S
The hardest part is making your feet turn and voluntarily walk in through the IRS doorway
Roger that.
If you want to download things off the internet as background preparation, Pub 583 "Starting a Business and Keeping Records" is a 21 pp. PDF pub on the IRS web site, http://www.irs.gov
Page 3 gives you a brief rundown on different forms of business with directions for where to get more info.
Pub 334, "Tax Guide for Small Business" (64 pp. PDF), is also helpful, as well as the instructions for forms Schedule C and Schedule SE.
I think somewhere on that IRS web site is the instuctor guide for the "Starting a Small Business" seminar that is typically taught at Community Colleges and various community programs.
Good luck
I don't know about Oregon, but California wouldn't let me do an LLC last year when I started up. For some reason, having a license from the Department of Consumer Affairs prevents me from operating as an LLC.
First of all, if the proper formalities are not followed year in and year out the "corporate and limited liability company liability veil(s)" are easily pierced. Anybody needing liability protection out of their form of organization should always buy an umbrella liability insurance policy. Form of organization is never a substitute for liability insurance.
If you are going to make furniture in your shop and won't be doing on-site work or additions to somebody's home then I'd keep it as a proprietorship.
Fees - in my state the annual fee for a corporation is $200 and $400 for an LLC. Nothing for a proprietorship.
I practiced as a CPA for many years until I turned my hobby into my job which is another story.
Very well put. People assume that LLC is a safety net that automaticly protects them from all evils. Some times you are better off keeping it simple as a Sole Proprieter.
Mike
Only your accountant knows for certain ;-)
I found myself in a similar situation three years ago. After treading water for a bit (longer than I should have, but hind-sight is perfect, or nearly so, LOL).
In the end I'm working under a DBA (Using your name may create the impression that all there is to your business is you, which is an impression you may, or may not wish to create) as The Whitehall Learning Group. Previously, like others in similar situations around here, I was Harrow and Associates. Ya gotta admit, TWLG sounds so ever much more sophisticated, LOL. The DBA was a one-time fee - $25.
The accountants we use (recommended by a friend with a small, home-based business) set me up with some Quicken Premier Home and Business to help me keep things straight. There are different ways of accounting, and our resident CPA can probably explain the whys of that.
As to the different forms of business ownership, I tend to the keep things as simple as possible for the task to be accomplished philosophy. You can always change later should the situation dictate.
Good luck!
Edited 8/19/2005 9:36 am ET by EdHarrow
Rick503 ---
Being the sole employee and owner you will get no liability protection from any business "form."
What you will get are tax benefits. You need to be careful to follow the tax code to get those benefits. Consider the example of bladmountain's health insurance example. An employer cannot deduct the cost of his own health cost as a business expense. He can deduct the cost of an employee's health costs. That can include the employee's family's health cost. There is a diffeerence.
Find a good CPA. I expect most will talk to you for FREE about setting up a business form tht suits your situation.
In Oklahoma the LLC form is 1 page and costs $25/year to start and renew.
GHR actually it was my example (not Bald Mountain) but anyway,
the guys accountant in the above example used to be an IRS auditor. He is quite agressive relative to most tax accountants but probably not as aggresive as a tax attorney.MarkVisit my woodworking blog Dust Maker
MarkRD ---Sorry for the error.My wife and daughter are CPAs. They are very good and very agressive.
cool. So they take deductions that other's might not?Mark
Visit my woodworking blog Dust Maker
MarkRD ---The short answer is yes.
With no offence intended toward your family. The problem with aggresive Accountant's, and Tax Attorneys is, whatever documents they prepare for you, there is a little Disclaimer on the bottom that says something like (This report is based on information provided, the preparer makes no claims as to it's accuracy etc.
Now if the worst happens, and you get a notice of audit, which often happens as a result of aggresive accounting practices, who is the first person you call? (The Accountant).
Now they will be happy to represent you during this process, but it wont be free.
( Well that worked out nicely, didn't it. )
Usually the most expensive part of the audit is the accountants fees
This happened to two friends of mine, and when they were finished ranting, I asked them both, (had enough yet)? They both said (YES).
Cheers. Walker1
I cannot speak for other professionals but ...My wife and daughter make their clients whole:If there is an error, my wife pays any interest and penalty. (Any tax due is the client's responsibility, but they did have an interest free loan.)If there are any questions from the IRS including an audit, there is no charge for handling the issue..... I am told that my wife is an exception.
Sole prop. is the way to go. With a liability ins. policy.
Being incorporporated will not protect you from a liability suit. It is meant to protect your personal assets in the event the business declares bankruptsy, but with small operations, Lawyers, can easily get around that.
A piece of advice. File every tax document, and make every payment on time, and dont claim any deductions you wouldn't feel comfortable explaining to an auditor. You will sleep better, and you wont have to reach for the antacid if the taxman calls.
It seems redundant to say these things, but not following this simple advice is the single biggest downfall of sole props. everywhere.
A certified Accountant, and a Lawyer are a regular part of being incorporated. A good bookeeper can look after a sole prop.
One more thing. Never do your own taxes, even if you can. Make sure a bookeeper does it, and they put their name on it. Filing your own makes the taxman take notice.
Cheers. Walker1
Rick
Forget fees. That's chump change.
The real difference is this:
A corproration earns money through the efforts of its employees. It has its own separate legal existence separate and apart from its employees, officers, directors (assuming all the laws are followed about meetings, record keeping, etc. and its not a sham entity).
Comes the end of the year and the corporation pays income taxes on the income it has earned. It pays salaries to its employees who also pay income taxes on the income they earn. Result: double taxation. Once at the corporate level, then at the employee's level.
However, a Limited Liability Compant ("LLC") (again, assuming all the laws are followed about meetings, record keeping, etc.), while it also has a separate legal existence separate and distinct form its employees (good for liability purposes) does not pay income taxes on the income it earns. All income earned by the LLC is "passed through" to the people who own it. They receive it as income (salary) and pay income taxes on it. Result: The same money is only taxed once.
That can be a significant chunk of change.
While a talented individual willing to put in the time and effort to learn the laws can probably successfully form and run an LLC, most people are probably still be better off with an accountant and a lawyer. There is no law requiring anyone to hire either an accountant or a lawyer - it's just common sense. They're the experts in those fields - you're the expert in your field.
Should an accountant or a lawyer build his own house? Many probably could, but....
Griff,
I don't know about the LLC but an "S" corp works exactly the way you described too. All profits passed thru to the owners... (my consulting firm is setup that way)Mark
Visit my woodworking blog Dust Maker
Hi Mark
Although I practiced law for a number of years in a prior life, I was never a corporate maven. The courtroom was my baliwick until I had had enough of it - no time off, no vacations, working all hours of the night and weekends, political justice depending on who you knew (and who you paid), and other fine memories. Eventually, my heart said "Enough!". Two double by-passes (within 20 months) later, I opted out - making sawdust is a whole lot more conducive to a long life.
So what I can say about corporate matters is somewhat limited and may be somewhat past being current practice. Generally, though, I think I remember enough of what I was taught in school to comment briefly on the subject. Not enough for anyone to rely solely upon, but enough to get you started in the right direction.
As I understand it, a corporation, whether a regular GM type or an "S" corp, is still required to file all sorts of extra documents (both to form itself and start up as well as to keep going in compliance with regulations) that are not required of an LLC. Between the IRS and SEC and the State, there's tons of extra work involved in starting and running a corporation that simply is not there for an LLC.
All of that extra reporting and work are missing from an LLC because it's essentially a glorified sole proprietorship or partnership that has been given the protection that a corporate existence normally provides (the shield from liability due to negligent acts of the LLC's employees, etc.).
I believe you're correct though that most, if not all, income earned by the "S" corp. passes through to the owners without taxation. Somewhere in the deep recesses of my mind, I do recall that there are exceptions to that general rule, but that they probably don't apply to most people.
Griff
If you decide to incorporate, make sure you choose an S Corporation. This way you will be taxed as a business one time only, otherwise, the IRS will tax your business and your personal income from the business seperately.
I have an S Corporation, and now I can deduct my car, home office, and I can take deductions for equipment depreciation. I have an ex-IRS agent as my accountant, and he manages to get my quarterly payments close to zero, all legally. If he thinks I'll be paying too much, he has me purchase more wood and a few other essentials, like a new router. This way my money still stays close to me!
Like others mentioned, get liability insurance. I pay $525 a year and it's deductable. But, a big but, make sure your business is legal, I have my shop in my home, the city of Chicago considers this illegal, thus voiding any insurance I have. I carry the insurance to make my homeowners insurance happy.
P.S... my brother is a lawyer, it would cost someone a lot more to sue me than for me to defend myself. Just don't give anyone a reason to sue you! Good luck!
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