D.S. Berenson, an attorney who specializes in home improvement companies and their legal woes, tells his clients never to do business as a sole proprietor. About 10 years ago, a client of Berenson’s did some roofing work on a house. Part of the roof came down in a storm, injuring someone in the house. The client — who had been in business for 20 years — was sued and not only ended up in bankruptcy but lost his home and all retirement funds.
“All that could have been avoided if he weren’t a sole proprietor,†Berenson says. The only advantage to sole proprietorship is that you don’t have to file anything with local or state government to start up. “There are no other pros,†he says.
MULTIPLE DRAWBACKS
But there are a lot of cons. These range from personal liability to tax consequences to IRS audits, which are more likely to happen to companies owned as sole proprietorships. “You have unlimited personal liability if something goes wrong,†Berenson explains.
Suppliers can come after you personally for payment, he adds. Even if you have insurance coverage, says attorney Barbara Weltman, “you still could face great exposure.â€
Sole proprietors must pay 100% of their Social Security taxes — a little more than 12% of whatever it is they’re paying themselves — which can take a big bite out of earnings. In addition, filing the required Schedule C with tax returns waves a red flag in front of the IRS, increasing chances of an audit, Berenson says.
CONSIDER INCORPORATING
Smarter options include incorporating or forming a limited liability company. “Your accountant and a lawyer need to advise you on the best corporate form,†suggests speaker and author Linda Francis.
The right choice for each contractor depends on many factors, including the number of people involved in running the business and how much income is earned. If several people are involved, for example, a limited liability company offers a lot of flexibility in allocating earnings for each partner year to year, says John Green, president of G&A Business Services, in Healdsburg, Calif. A subchapter S-corporation — a very simple form of incorporation — helps cut back on the individual payment of Social Security taxes.
“The No. 1 consideration should be protecting your home, car, and personal assets,†Weltman says. “It has nothing to do with size or how long you’ve been in business. The cost for incorporation is so small compared to the risk that you’re exposed to. It’s never too late to make that change.â€
Replies
if someone is inc or llc for the liability protection they need to do a lot of reading of how that comes about. it's not just inc and your done,you have to run your bussiness just like ibm runs theirs. and if you don't any 15 cent lawyer will bust the corp and get to you personally. larry
if a man speaks in the forest,and there's not a woman to hear him,is he still wrong?
i bought a book about running a plumbing business, author was talking about insurance.
as you say incorporating or becoming an LLC is not enough.
this particular plumber described how he screwed up a very expensive one of a kind countertop while installing a sink, accidents happen. he tells customer and reports it to his insurance. insurance pays for the countertop guys to re-work and pays plumber to do his re-work.
plumber ends up making more on job because increased scope of work, customer is happy because plumber is stand up guy, insurance goes up, but not too much cause plumber doesn't have a lot of claims, (he really is a stand up guy) and everyone is happy.
you don't need to make it more complicated than it is, but you do need to have insurance for when you are working on someones house and you have an accident. if you have insurance in your corporate name, that goes a long way.
customer is happy because plumber is stand up guy
I believe most customers are like that, but it only takes one self-centered greedy customer to burn a good, upstanding contractor. I'm happy to say that I don't believe any of my customers would pull a legal technicality on me (and half of them are lawyers), but not all of my work is for my regulars. We have to keep in mind that we work for the general public, and if we leave ourselves open it's just a matter of time before it comes back to haunt us. --------------------------------------------------------
Cheap Tools at MyToolbox.netSee some of my work at AWorkOfWood.com
I was in a class (sent by my employer at the time) teaching about water damage restoration about five yrs. ago. Because of the federal regs on MSDS papers, if you had an accident and did not have a paper for one of your chemicals or paints or had a paper for something you did not have , then you just legally violated your corporate veil of protection and could be sued.Granted.. the chances of someone checking are super slim, but the rules are so tight that you could spend half your week just making sure you are in compliance.
You don't have to run your business just like IBM. IBM is a C corp. The S corp was created just for the small guys.Why resist forming an S-Corp or LLC? It is not expensive. For one thing, there are tax advantages.In general, your personal assets will be protected. Piercing the corporate veil is rare. It does happen, mostly in cases where the owner commits gross negligence because they think they can hide behind the corporation. Been there done that. I had an S corp and we got sued by the customer from hell. GLAD we were a corp. I work for a company now, but next time I am on my own, I am forming an S corp or LLC pronto.
i don't think the corp veil is any different between s corp,c corp or llc,the way you are taxed is the difference. c corp is taxed on it's own while a s corp the earnings come into your personal tax base. llc i don't know but suspect it's the same as a s corp.
to keep a corp legitimate takes some effort and with a very small company all the rules are usually not followed through on. do it right and it does help to protect you though. larryif a man speaks in the forest,and there's not a woman to hear him,is he still wrong?
In an S corp, the owners pay themselves a salary subject to normal payroll withholding, plus they take owner's draws which are not subject to payroll taxes. In an LLC, all profit is taken as draws--you don't pay payroll taxes on yourself. You won't be paying into social security, which may or may not be a good thing.Considering the liability we get exposed to in this biz, I think it's worth the effort to be a legitimate corp. But don't just listen to random people on breaktime, go see a local attorney and accountant for advice relevant to your own state.
You can pay yourself as an employee of the LLC, as well as take profit. Bob's next test date: 12/10/07
That article is the biggest bunch of #### I have ever heard coming from a supposed "expert" Why does any small buisnessman really think that a corp really provides him with any significant protection. If a small contractor screws up his corp is going to be sued as well as HIMSELF. There goes that protection.
How many suppliers are going to give credit to a small corp without a personal guarantee? None to my experience. As to the social security taxes, you would be taxed on your wages and not on company profit. That sounds good you say. So you just pay yourself a small salary and take a large dividend payout. The IRS does not like that. That will get you audited faster than anything.
A corp for a small businessman is like a doorlock. It will keep out the curious, but not the determined.
"As to the social security taxes, you would be taxed on your wages and not on company profit. That sounds good you say. So you just pay yourself a small salary and take a large dividend payout. The IRS does not like that. That will get you audited faster than anything."No, the corporation is not a license to be stupid. You will want to get an accountant's advice. The IRS has guidelines for how much is reasonable to take as salary and how much to take as draws. Still, the tax advantages are real.
All good food for thought but I wouldn't count on incorporating to shield me. I worked as a sole proprietor for many years, allowing my own good judgement to avoid problems.
If I don't get a positive feeling when talking with a potential client, I simply don't do business with him/her. Most other small contractors I've known use the same method to stay out of trouble.
I also formed limited partnerships with a few guys I worked with, to keep from being responsible for expensive WC when we both had other forms of insurance.
There's one other way to avoid loss of personal property. You can form a corporation to hold the property and then lease it to yourself as a tenant. If your own state laws don't protect you that way, I've heard and read that you can form a Nevada corporation to hold the property. There are supposedly many advantages to that move, including anonymous ownership of the corporation.
Edited 5/23/2008 1:22 pm by Hudson Valley Carpenter
"You can form a corporation to hold the property and then lease it to yourself as a tenant. If your own state laws don't protect you that way, I've heard and read that you can form a Nevada corporation to hold the property. There are supposedly many advantages to that move, including anonymous ownership of the corporation. "The problem is that what they go after is YOUR assests.The ownership of the corp that holds the property is an assest of yours that they can collect on.Now that does work if part of assest hiding by have a spouse own the corp. But that sometimes leads to other problems..
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A-holes. Hey every group has to have one. And I have been elected to be the one. I should make that my tagline.
Understood. That's why I threw in the Nevada corp idea. One need not be a resident of Nevada to form a corp there. The corporate laws were written to protect various "investors" in gambling and night club establishments, back in the 1920's and 30's as I recall.
The corporations' owners are anonymous so that puts to rest any concerns about who's leasing what from whom. Theoretically I could put all of my property; home, equipment, tools and other business assests under a NV corporation which I owned, without risk of loss through civil action.
Under Nevada laws a corporation issues bearer stock. If you put assets in a Nevada corporation that you have set up it is true that the corp owns the assets, but you are in possession of the bearer stock. If you are sued and and lose you will have to disclose your assets under court order. You would have to confess to having the bearer stock or be guilty of perjury. Ask Barry Bonds about perjury.
That's good to know. I had not previously heard that important detail. Thanks for the clarification.
So what happens if you give your bearer stock to a family member who is an officer in the corporation?
Edited 5/24/2008 6:22 am by Hudson Valley Carpenter
If you give your bearer stock to someone else it will set up a taxable event in the eyes of the IRS. And then when it is given back that is also taxable.
What if you set up the corporation with all the stock in other family member's names but keep control of the company in your hands until your death? No transfer of stock, ever.
I went to a rapid fire seminar on this topic, about ten years ago. Most of the details have gone from my memory but I do recall that the basic premise of forming a NV corp was to protect (hide) assets and avoid inheiritance taxes.
Yes, you can issue stock to family members and not have to worry about transfer issues. As far as you "staying in control", that is only at the whim of the stock bearers. Can you be POSITIVE that you will always be able to control these stock holders? Also what happens if one of them gets sued? You may find a plaintiff as major stock holder.
Check on incorporation in Wyoming. From what little I understand the corporate laws are even more favorable. Either way, a good, motivated lawyer is going to uncover anything as long as he is paid enough to do it.
So what happens if you give your bearer stock to a family member who is an officer in the corporation
Now your family member owns all your assets. If you transferred them to avoid a creditor, you and the family member will get sued under the Uniform Fraudulent Transfer Act, which is in force in most states. If done "just in case," it better be a trustworthy relative or you may find your house got sold to pay off a gambling debt.
There are ways of protecting yourself against financial disaster, but, like taking out an appendix, the process is generally best left to a professional. For most people, a combination of operating your business using the proper form and getting the right insurance, will take care of most issues. For the truly rich and/or paranoid, there are all sorts of asset protection schemes, some involve criminal tax fraud, some don't.
Note with a Nevada bearer corp is that most banks are going to drive you crazy with their Know Your Customer Rules. In the past bearer corps have been used for illegal activities. With the Patriot Act and the strong anti-money laundering rules attached bearer corps set off all the red flags. This may prevent you from getting a business line of credit without extensive documentation. (time and legal cost).
I formed an LLC,
On the advice of my accountant and lawyer.
I followed their advice to the letter on all fronts.
I still got whacked by the tax man as well as watching a friend who used the same lawyer and accountant damn near lose it all over something that wasn't his fault.
A. NO S-Corp, C-Corp or LLC is worth a piece of paper unless you form it and maintain it using GOOD SOLID COMPETENT LEGAL AND ACCOUNTING ADVICE.
B. None of the above are a substitute for INSURANCE!!! In the right amount and the right kind.
"A. NO S-Corp, C-Corp or LLC is worth a piece of paper unless you form it and maintain it using GOOD SOLID COMPETENT LEGAL AND ACCOUNTING ADVICE.B. None of the above are a substitute for INSURANCE!!! In the right amount and the right kind.
"C Hide as much ownership as you can. Control things, don't openly own them. Use trusts. File mortgages on your paid off property. When the lawyers go looking for deep pockets, you'll look broke. Bob's next test date: 12/10/07
I agree trusts are the other part of the equation. Ask the Brown family how much luck they've had getting to O.J.'s money protected by trusts.
Actually, the reason that OJ protected so much of his assets is because he moved them all into his new home in Florida. Florida is one state that has "special" protection powers regarding the homestead. If you lose a lawsuit and move all the assets into a florida home the day befor e the judgment, it is safe. Florida will not allow someone to be forced to sell their house to satisfy a judgment. Or so I have been told in some of my readings. Bob's next test date: 12/10/07
that is an interesting and possibly very valuable nugget of information.
thank you.
someone hit the nail on the head earlier about corporations and LLCs. those juridical entities provide limitations on liability of the shareholders or members, but they provide no limitation on liability for the employee or person who does the harm. you cannot hide your negligence behind a juridical entity. if you do the harm, you're on the hook. if you don't do the harm, an llc will protect you.if i'm driving my company truck on company business, and i run over a bus full of surgeons, they come after me and the llc. if i'm riding in the company truck, driven by an employee, and he hits the surgeons, then i am protected. typically the docs can get the employee and the company, but not me.insurance should always be the first line of defense.