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I recently had a post where a guy suggested going LLC. I was planning on going sole proprietor for the fact that it’s a lot simpler than LLC. I really don’t have a lot of work to justify the costs it would be involved to go LLC. Are there people out there going sole proprietor and wished they were LLC or will I be all right going sole proprietor.
The work I do is home repair and remodeling, not any new construction.
I understand going sole proprietor all the assets I own are pretty much in jeopardy (my house for example) but was told that there are ways around that. Any advice is appreciated.
Replies
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Talk to your accountant and lawyer. If you don't have one get one. I went subchapter s the only expense is extra tax work and $100 /year to maintain.
I save way more then it costs me.
*pantango,I do the same thing as you do. I am currently a sole proprietor, but am gonna go LLC. As a sole proprietor, EVERY dime I make above the actual cost of doing business is considered my income. Everything I own is considered an asset, whether business or private, and is fair game for anyone out to sue me. There are laws that will protect your home and a vehicle for transportation, and even a few other things, but you are still putting it all on the line. Not much worries until you get pretty large in size. The thing that really irritates me to no end is the Self Employment tax. If you are self employed, count on paying in roughly 42% of your income in taxes. That's almost half of your income. That sucks, and I'm getting tired of paying it. I have been looking into some LLC options. I kinda like the S corp idea, and a few others. Being small, and operating alone, I never thought I needed more than a Sole Propretorship. The more I listen to these guys here, the more I realize how wrong I have been. Of course, this is assuming that you are gonna be legitimate, and legal, and pay all of your taxes. All it takes is ONE audit to catch a sole proprietor not paying taxes. You will suffer unimaginable hardships, and they will continue to audit you for many years after. I have a family member that got audited, and his life has been a nightmare since then. His situation, and the thought of having to go through it myself has kept me in line way past the fact that I'm an honest man. Just a thought...James DuHamel
*I also should have mentioned that this was going to be a part time business. I have no intentions to quit my full time job that I currently hold. Maybe after a while (few years) if things go good, I might consider it.
*patango.. i was sole p. for 25 years... finally woke up and went Chptr. S... wish i had done it right away...sole p. was too easy to run it like a hobby instead of a business...also.. i was the last one to get paid.. now i get paid every week... got a good boss too !
*We just changed to a LLC from a Soleproprietorship. My suggestion is to set up as a LLC from the start. The change over process is a pain especially if you plan on ever having employees.Talk to your accountant but from what I understood mine to say there's no extra work in the tax paper part to go that way. And you get the benefit of protection should you ever be sued.
*I don't think there is any reason why you i shouldn't set up an LLC, but could probably find half a dozen reasons why you should.The use of the LLC has soared in the past few years since the courts have ruled in favor of them against the IRS. There are still many untested aspects, but for your simple business, you will benefit from the liability issue.Make sure the LLC is set up right and maintained correctly. There isn't too much to do but do it right anyway-mostly simple things, keep seperate bank accounts, always sign the name correctly, keep seperate books.Plan on going big and you will get there. Be careful of what you wish for!blue
*I completely agree with Blue on the LLC. There are many reasons for and very few if any against setting up and LLC. If you do also ahve completely different lines of business you may consider a separate LLC for each as well. It may be a little more work to maintain but if you have a significant new construction business and a separate remodel LLC the assets of one cannot be touched should the other be hit with a lawsuit. Also, your personal assets are not at risk should your company get sued. I believe with as a Sole Prop. your personal assets cannot be distinguished from your business assets.Obviously seek the advice of a tax advisor and lawyer familiar with entity creation and your states laws.SJ
*I have talked to my accountant, and just for the record here is what she said:There is no tax advantage to an LLC.There can be a tax advantage to a Corporation given circumstances.The reason for an LLC is separation of assets from personal to business.An LLC is fairly simple to set up, in my case $200. The problem is the cost of printing and changing title to my vehicles and names on licenses. I figure total, this could run close to $1500, not to mention the hassle. The question is: If all it is is an insurance policy for my personal assets, what's it worth?If I was starting over I'd definitely do it. The fact is I'm on the other end of my career and I'm thinking about it.Terry
*Terry, only you and your cpa know what your assets are worth. And, all you have at risk is your assets. If they are small, then you have a small problem. For instance, if a guy is living in an old beat up refridgerator box, he probably wouldn't worry too much about protecting his assets. If the box was new, with a nice shiny wax finish, he might want to add a layer of protection. He might set up the Box LLC to limit his losses to that box, and all it's containers.I'm also at the end of my career, as a carpenter contractor. All of my income over the years was generated through a C Corp. If something horrible happens to my corp, as I wind down my career, I only stand to lose my business assets, which is my tools and truck, which I don't want anyways! The other assets, purchased with employee earned monies, is protected. How about just starting a new LLC and doing all future business in that? Rent your vehicles from yourself (have a formal document on hand in the LLC). Rent the licensees, or set up whatever arrangement you have to in your state. I think these ideas will lower the new money needs, but you'd have to get new stuff printed. Your stuff probably needs updating anyways...if your old enough to retire!blue
*What does LLC stand for?Ed.
*Hi EdLimited Liability CompanyTerry
*BlueI have debated the issues you put forth for the last 5 years. This is the reason for my advice to a starter company. On the other hand, my single largest expense at this point in my career is INSURANCE. I resent it. I know this is an unrealistic view. I resent taxes too, and yes I still pay them. My mindset is that when it comes to liabilty for my company, I have insurance. The odds of being sued and losing my personal assets seem insignifigant compared to the odds of me taking a misstep on a job site and living the rest of my life in a wheelchair. I'm not saying my rational is logical, as I said, I resent insurance.Terry
*Terry, I too resented insurance, especially in my earlier days when money was tighter. I'm over that now and just look at it as a necessary business expense.I'd like you to do something however. Take out every insurance policy that you own and read all the fine print. Focus on the exceptions, limitations, etc. Are you really covered as well as you think you are? Do you have an umbrella policy that protects you in your personal life and professional life?Now, calculate the risks. Use the cost of protection, vs what you have to lose. Make a decision based on numbers, not emotion.Think rationally. Your family depends on that.blue
*I'm curious as to the real protection LLC's and corporations give. I occasional act as an expert witness in construction litigation for 3-4 different attorneys. I basically do the cost estimating side of it and some method of repair stuff. Every case I've been involved with the suit is against the corporation as well as the individual "in charge". The attorneys I work with always seem to win and work hard to get money from the individual if the corporation is a "shadow" corporation. Is there a loop hole somewhere?Eric
*Regardless of what type of business entity is used, most small businesses are not run with sufficient attention to corporate (or LLC) formalities to escape personal liability completely. Small business owners can't seem to get it through their heads that the key to limited liability is to take the business form seriously.One of the most common problems is that you form a corp or LLC and then print up business cards that say "Joe's Construction Company." Joe can kiss his limited liability good-bye.SHG
*Shg, I agree wholeheartily. I've been running a Corp for many years that wouldn't stand up in court. I finally started taking control of my financial matters and attended a seminar on asset protection. I would highly recommend that everyone involved in a business of any sort do the same. It does take time out of your leisure life, but it's a financial reality nowadays. There are a lot of hats to wear when you are self employed. You either have to use professionals, do it yourself by educating yourself, or suffering the consequences.Or, you can simply get lucky.LLC's are the way to go, if you want to minimize formalities. You might not take full advantage of all business deductions, especially related to fringe benefit deductions, but the formalities are easily followed.blue
*Blue, it's got to be killing you to be so damn agreeable lately. C'mon, let a little steam out and we'll all look the other way and never mention it again. I for one am sort of missing the old cantakerous Blue.SHG
*ok... hugs & kisses all around...now...if i'm S-corp .. what advantage would LLC give me?
*Got a better question for you Mike: When's the last time you gave written notice of the annual meeting of the board of directors of your S-corp? Where's the corporate resolution to engage an accountant?See what a lawyer who's looking to get behind the corporate limited liability might look for? Sorry that I didn't answer your question, but I'm just having a little fun.SHG
*my lawyer makes up the corporate minutes and the annual meeting resolutions.. if i didn't have a lawyer, who gives me a lot of work, whom i've known since college.. i'd probably try to hire you..or sign up for Blue's PPLbut those are good questions... lazy me will probably print them out and paraphrase them in a query to my irish lawyer... do you want ot be on 1 of the flame teams?... or are u content with the hugs & kisses?.. i wuz thinkin tag-team rules
*here's another thot...every young couple starting out... especially if they are inbusiness for themselves .. should have the following:their own accountant,their own insurance man,their own lawyer, a family doctor,a plumber, a contractor, an electrician,and all of these people should be their age or younger.. so they will still be in business when you need them.. time flys...
*Is it legal to setup an LLC in California?
*FWIW...I recently discussed all this with my CPA and here is what he said: LLC is relatively new and there isn't much precident established in legal maters concerning LLC. If you become an LLC and have to go to court on something, you may be in the VERY EXPENSIVE position of pioneering. On the other hand, S Corps have been around a long time. You can likely find existing decisions on most everything. And that will save you time and legal fees.Because of this and the tax treatment, I decided to go S instead of LLC.
*Your CPA should stick to accounting because he knows nothing about law. That's utter nonsense.SHG
*Shg, there is some truth to that CPA's assertion. LLC's are the youngest of the group and therefore still have issues that will eventually be challenged in the courts. Utter nonsense is a bit strong. Most contractors aren't going to get too involved in matters that will test LLC case law history though. So, although the CPA is correct, on some level, I think he's scaring his clients into making bad legal decisions.blue
*Blue,First, there is absolutely no issue as to the viability of the limited liability component of LLCs. That they are a new innovation does not mean that there is anything novel about the limited liability. So, to the same extent that limited liability protected corporations, meaning that the formalities are followed properly, it is exactly as safe to use the LLC form. So, utter nonsense is precisely what I mean.Second, I don't mind that non-lawyers discuss legal issues and get things wrong. It happens here constantly. But when a non-lawyer CPA misadvises his clients, but practising law with neither a license nor the knowledge necessary to render correct advise, that pisses me off. His advise was ignorant scaremongering at best.SHG
*we are now an LLCmy CPA was against it at first, then finally said that she did not know enough about it, but her son who is a CPA and now an LLC could help.He is the one who suggested I look into it and become an LLC.As far as S-Corp vs LLC one of his arguments is that S-Corps have been around a long time and therfore lawyers etc have learned how to go after an S-Corp and the individuals behind them , where an LLC being new there is very little presidence of how to go after the idividual.that was not the reason we became an LLChe said that as small as I was and being a sole proprieter an LLC was more suited for me. It would give me more protection and for less red tape and lefgal feees and legal "daily running" expences.then an S-Corp.I then spoke briefly with a friend of his whom is a Lawyer and an LLC who confirmed a lot of what I had been told. I then did more research at the library on LLC. I read many books but the most influencial were "Stating A limited liability Company" by Shenkman, Weiner and Taback, all three tax, bussiness and estate attorneys, and another book on LLCs by friedman sho concentrates his practice on small and family business.Also our state of registration office (Oregon) offered at the time a two sheet paper listing all the different forms of corporations and the compariosn of each. It was a brief comparison but did show how the state looked at each one, they also offered forms on becoming anS-Corp or an LLC.good luckchoose wisely, check sources
*This has to be the umpteenth time this has been discussed in the last few months. The archives have to be full to overflowing with info on this subject. So, for a more complete discussion spend a few? minutes there.Best of all check with your local govt office that helps set up small businesses. They have a wealth of info on which business form is best for what kind of business. Depending on what you do and your goals either Sole Proprietor, Sub S Corp, or LLC may be for you. BUT, it depends a lot on what your goals are and the State you are in. You can't make a wise decision based on quicky information you get here from a bunch of strangers whose information may be worth exactly what it costs.
*Fred, every subject has been discussed upteen times. The only thing that is repeated more, is instructions to go to the archives.If we actually took that advice, no one would ever post here again.blue
*And your point is????
*Same as yours....a waste of bandwidth.blue
*I recently set up my construction business as an LLC. I don't know all the rules I'm supposed to be following. Can anyone briefly explain them to me? My lawyer is hard to communicate with...I don't know about you guys, but I don't have much luck with the archives here--when I search for a specific subject, I get all kinds of unrelated stuff to sift through. I agree with Blue, it's a waste of bandwidth the way it works now.
*dawg.. i'm no lawyer.. but u oughta get one who can talk to u.. as far as llc.. i'm assuming they have the same req. as chapter S.. don't co-mingle funds.have annual meetings and minutes of the meetings with a corporate book...file your taxes before March 15th..not April 15th..keep your state charter current with your annual filings to your secretary of state...never sign documents as an individual, always use your corporate titleand so forth , and so on...
*sometimes I don't want to know what people said way back in some archived thread - often better to get a fresh discussion with current views of the people posting today for this specific subject, I am glad a new thread was started, it interests me, but, I hadn't come here looking for this subject and therefore would not have checked the archives. thanks to the new thread I got some info and a reminder that I need to set up a LLC
*Mike,Are you sure I need to hold annual meetings? Who am I meeting with, being the only person involved in the LLC?It's not like a corporation is it?
*dawg.. i'm not a lawyer.. but it is my impression that LLC's are another form of corporation..and pretty much must observe the same requirements...what you are trying to do is NOT be the same thing as your LLC... if you are and they are not differentiated.. then if you sue one , you sue the other..here'some information that you can purchase.. some of the forms looked like the cat's pajammas.. also .. it is STATE specific..course.. if someone with legal KNOWLEDGE can fill us in .. that would be great too..http://www.uslegalforms.com/findforms/llcformation.htm
*Mike,Thanks, but I already did set this up, just haven't tracked down the lawyer yet to find out what to do. But I definitely did not think this was a system that required the bogus meetings, like a corp.I'll get in touch with him one of these days.
*dawg... i been wrong before.. i'll be wrong again..
*in our state you do have to have monthly meetings with notes. However one main difference is that you d o not need a lwayer present or to type up the minutes. Never did look into it if you are a single person LLC.Bogus meetings. maybe. we all get togethre , go out to dinner and talk shop, and it is a meeting so it is a right off.we do discuss a basic format though. Current jobs progress, upcoming jobs,employee needs and wants, tools needed and those wantedsure in a small goup like ours this really might be bogus, but since we have to have a meeting, why not a fun one.
*Dog, the legalities of maintaining a proper LLC are significantly easier than a corp. The "bogus" meeting amongst yourself is not bogus at all. Just do it and write of the meal of the resturant that you eat in. Make sure that you eat in a significantly more expensive place than you normally eat in, especially if you have other participants in the meeting.I could pull out my manuals and give you the exact requirements, but I'd eventually say that check with your local atty to verify all of my suggestions anyway. So, I'll simply say that you won't get advice here, that is reliable. If we're wrong, you can't sue us for misleaading you. If your local atty gives you bad advice and the IRS disallows your LLC, or a civil suit penetrates it, then you can sue your atty....unless the statute of limitations expires (that happened to me). blue
*Blue,No problem, I don't want to sue anyone, but I can see that you'd be afraid of me since I'm 2-0 as a starter, and just resting between games for a real test!I don't mind taking myself out to eat. I'm not sure if I should talk to myself in a nice restaurant, but I'd really like to discuss tools, bitch about clients, and consider the future with a guy as likable and knowledgeable as well, myself...guess that's not a bad business idea... Hey dog, pass the escargot! How do you feel about biker women, think we outta hire some? After lunch let's see if the "man" will spring for some new tools, I think there's a powermatic sale on now...Yeah, I like the sound of this! Waiter, we need more wine please...and some of those naked lady tees, give me four of them, some of those,
*Regarding the "bogus meetings". I had a lot of them back when I ran a Sub-S. The lawyer churned out the "boilerplate". That was a mistake.I would've ended up much better in the long run if I had actually had an annual meeting. I didn't need a meeting of the board, I needed a meeting with lawyer, accountant, and insurance guy(s). This time around, I'm gonna try and swing an annual meeting with all three there..."this is what I've done in the past year, this is what I'm thinking about for the near future...should I be changing anything???" Kind of an expensive hour, but I'm sure it would've saved me a lot twelve years ago.Rich Beckman
*good point , rich...see if you can get some real directors on your board... and pay them a fee to attend..nothing like someone else looking over your shoulder
*There's a reason for the formalities. And even a reason for the meeting, even though it's a group of one. Having the lawyer and accountant present is an excellent idea.You would be surprised how easy it is to fall into the trap of ignoring the formalities, rationalizing that it's only you and who would know and who cares. Take a day, May first each year, to sit down, review the years progress, costs, expenditures, decisions. Most of us keep meaning to assess our business, but never take the time to do so. Also, our egos get in the way. We create Joe Smith Inc., but our business cards just say "Joe Smith, Master Bater" because it feels stupid putting Inc after our names. And we are the business after all, aren't we? And people come for us, not for some Inc name, right? And when we need money, and it's sitting there in the business bank account, we can just pull it our, right? Who's going to complaint, right?But I will tell you the down side to all of this: If you do business with me, and you're a small operation with an Inc after your name, I'm going to want you to personally guarantee your work because I want to know that you, the man I shake hands with, is going to be there if something goes wrong and not some empty shell of a corporation that can go out of existence overnight. Just like you want protection, so do I. So don't get bent out of shape when some customer tells you that he's contracting with Joe Smith, not with some Inc.SHG
*another good point...more than half of the credit accounts i have with suppliers require me to sign individually and corporately...but.. i guess we wander.. is the formality any less for "LLC" than "s"...or is there something magic about LLC that eliminates this ?
*I just talked to my accountant today. She said she recommends the Sub-S unless you already have a substantial earned income from other sources. She said that all income from an LLC is considered earned income and subject to social security taxes. Only income paid as a salary from a Sub-S is earned income. Otherwise it is a dividend and not subject to social security taxes.Of course, once your earned income reaches the cut-off (somewhere in the 80's I believe), no income is subject to social security taxes.The insurance guy had no opinion.Haven't talked to the lawyer yet.Rich Beckman
*One exception to that discussion Rick is passive income. Passive income generated by an LLC is not subject to self employment taxes.blue
*Blue...Can you give a quick definition of "Passive income"? THanks.
*SHG,good points. I appreciate you taking the time to assist. I'm with you on the meeting thing, won't consider it bogus unless I make it that way. MD