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    Tag: sole proprietor

    Sole Proprietorship or LLC?

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    Laura Siegert December 4, 2021
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    Forum Description

    Being a sole proprietor is the easiest form of being in business. You are the business. That being said, some states and local municipalities do require that you register your business. In addition, if you’re doing business under a different name, then you may need to file a DBA with your state. So, for instance, if you are Joe Smith and want to have a business called Let Me Cerakote Your Gun, you need to check with your state to see if you need to register that business name.

    Sole Proprietor Pros

    • Easy setup: all you have to do is register your business if your state requires it. 
    • Since you are the business, you get to make all the decisions. You can make changes and try new things without having to get someone else’s blessing. If you want to buy a pricey gun for display, it’s your decision.
    • Taxes are easier! You can file a simple Schedule C with your IRS 1040. 
    • You can get a Self-Employed Retirement Plan (SEP IRA) that will give you higher tax deductions.

    Sole Proprietor Cons

    • Since you are the business, you take on full liability. You are personally responsible for all business expenses and debts. You are responsible for product- and property-related liability. You can even incur civil damages if your services are not up to par.
    • It may be harder to get a loan. First, since you are the business, a bank will give you a personal loan instead of a business loan. Second, since sole proprietorships tend to have less assets it may be harder to get a loan.
    • If you default on your debts, creditors are more likely to come after your personal property if your business assets don’t cover the debt.
    • When you die, the business dies. There is no continuity for the business to outlive you.
    • You can’t hire any W2 employees. You can have contracted employees (1099s), but they are unlikely to stick around because of the lack of benefits you offer
    LLC related concepts in word tag cloud isolated on white background

    While there are many different types of business structures, Limited Liability Corporations (LLC) are popular because they are fairly painless to set up and manage. The biggest advantage of an LLC in comparison to a sole proprietorship is that the business liability is lessened for the owner(s). Business assets are segregated from personal assets; which means your personal property is protected.

    LLC Pros

    • That aforementioned liability protection is by far the greatest pro of structuring your business as an LLC. If you end up in court, the business’s assets may be taken to settle conflict, but the owner(s)’ personal property is protected.
    • An owner’s liability is limited to their percentage of ownership in the LLC, not the entire business as a whole. In the case of John and I, we are 50/50 owners. So technically speaking, I would only take on 50% of the business liability and John would take on 50% of the business liability.
    • In regards to taxes, both the sole proprietor and the LLC are considered “pass through entities”, meaning the business’s income is taxed as income of the owner/investors. There is no double taxation, such as you’d find in a C-Corporation.
    • An LLC can have one or more owners (they are called “members” in legal terms). Members can either be a person or even another business. 
    • Since you can have more than one member, you have more than one person running the show. This is great when you can bring different perspectives and talents to the table.

    LLC Cons

    • There are more start-up costs with an LLC, such as the state filing fee. If you hire a lawyer to set the LLC up for you, then it could cost substantially more. Some states even charge yearly fees to LLCs, so be sure to check out what your state expects in the form of fees.
    • More paperwork! As an LLC, you have to file Articles of Organization with your state (check out your state’s requirements). In our case, we even had to provide our Articles of Organization to the bank in order to open a business checking account. Further, drawing up an Operating Agreement is very important in order to protect the LLC in the case that a member dies. You will have to file for an EIN with the federal government if you have an LLC for tax purposes (click here for more information).
    • More taxwork! It is important to keep on top of your businesses income and expenditures rather than waiting until the last minute to drag out receipts and cull bank accounts for income. For the LLC owner, it is VERY important to separate personal from business expenses. When there is a cross-over between personal and business transactions, it is legally called “piercing the veil” and leaves an opening for personal liability to be at risk. To help separate personal from business expenses, have two separate checking accounts.
    • If you set up your LLC as an S-Corp with the IRS, there is the added benefit of being taxed on only the income you personally derived from the business (as an “employee”) rather than the entire company’s pretax profits.

    You are allowed to change your business structure after you've already been in business. John and I went from a Partnership to an LLC a few years into our business. We did have to reapply for our FFL, but hey, what's a little more paperwork!

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