While operating as a sole proprietor is a simpler and lower cost than forming a separate entity, there may be some benefits of separate business entity that you may be missing out on. A Sole Member Limited Liability Company is often the go-to entity when sole proprietor wants to create an entity because the business owner does not have partners or other investors required for some entities, such as a partnership, and a Limited Liability Company offers flexibility that other entities don’t.
A Limited Liability Company is owned by its investors which are called members. Unless there is an operating agreement providing otherwise, the Limited Liability Company (“LLC”) is controlled and operated by the members. In a Sole Member Limited Liability Company, there is only one investor, so the sole member is in charge.
Here are some considerations when deciding whether it is worth it to form an LLC for your small business:
Privacy
A separate legal entity will have its own identifiers, such as Employer Identification Number. After your business grows to a certain size, you may not want your home address and personal social security number to appear on all your contracts and be on file with all your vendors. Additionally, if you’re going to sell your business or take on an investor down the road, you will have the ability to assign the existing contracts and assets to the new owner or investor with more ease than if everything is entered in your name alone.
Tax Benefits
A sole proprietor’s net business income is taxed on his or her individual income tax return at the proprietor’s personal tax rates. A single-member LLC defaults to a “disregarded entity” for tax purposes meaning it is taxed the same as a sole proprietorship unless the LLC makes the election to be taxed as a corporation. So, your tax preparation bill does not necessarily double due to conducting business under a Sole Member LLC. The election to be taxed as a corporation is done by filing a Form 8832. This election should be explored in detail with your Certified Public Accountant to quantify the cost of making the election (separate tax return, etc. ) versus the savings from making the election.
Credibility
A separate legal entity may give your business more credibility with clients or lending institutions than operating as a Sole Proprietor with a “Doing Business As” name (“DBA”).
Liability Protection
A sole proprietor offers no protection to you as the business owner from liability, claims, and creditors. You are the business, so anything you own is up for grabs if the company gets sued. Unless you are forming a multi-member LLC, then a sole member LLC and sole proprietor classification will not assist you with liability. Unfortunately, the liability protection of a single member LLC in Florida for the moment has been eliminated by the Supreme Court of Florida ruling in Olmstead v. FTC, Fla. Sup. Ct. No. SC08-1009 (2010) (“Olmstead”), which is a topic for another blog. Insurance is always a good protection vehicle for potential liability whether you are operating as a sole proprietor or an entity. For creditor issues that arise, make sure to get an attorney involved early on to prevent a dispute from taking over or dooming your business.
These are just a few considerations. What is right for each business is going to depend on the type of business conducted and where the company is in its development. It is essential to discuss these and other considerations with an experienced business attorney and your certified public accountant before making a decision.
Disclaimer: The information in this blog post (“post”) is provided for general informational purposes only and may not reflect the current law in your jurisdiction or the jurisdiction applicable to your issue/matter. No information contained in this post should be construed as legal advice from Roberts Law, PLLC or the individual author, nor is it intended to be a substitute for legal counsel on any subject matter. No reader of this post should act or refrain from acting on the basis of any information included in, or accessible through, this Post without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from a lawyer licensed in the recipient’s state, country or other appropriate licensing jurisdiction.
