Going into business entails lots of decision-making and one decision is to choose the legal structure for the entity. There are three choices: Sole Proprietor, Limited Liability Company and Corporation (typically S Corporation for Solopreneur consultants and small business owners). Most Solopreneurs begin as Sole Proprietors and many remain there. If business-related liability is not an issue, that is a perfectly acceptable choice. About 70% of US businesses are Sole Proprietorships.
However at some point in the life of your business, perhaps as revenue and reputation grow, it may be advantageous to move beyond Sole Proprietor status. You may decide to operate your organization through an entity that limits your personal liability as the owner (alone or in partnership) and decide that it’s worth the approximately $500 annual fee, plus maybe three hours of attorney or accountant hours needed to discuss why establishing the LLC will be a good strategy can I be my own registered agent?.
Another motivating factor that might persuade you to create a separate legal entity could have its roots in marketing. Some Solopreneurs feel that establishing a legal entity for the consultancy makes the business appear more trustworthy to clients and prospects. The legal structure will function as a marketing tool and liability protection is less of a concern. Whatever your motive, the matter of selecting your legal entity will present itself. Should you structure as a corporation or as an LLC? The answer is— it depends.
Most Solopreneurs and small business owners are directed by their accountants and attorneys to the LLC. It’s flexible and easy to set up. Your state’s Secretary of State office will have the application form online for you to inspect. There may be one or several owners of the LLC, but there must be a registered agent (to receive mailings associated with the LLC) who resides within the state in which you register and operate.
A big advantage of organizing as an LLC is that you will receive protection from creditors. If the business owes money, those who are owed will not be able to attach your personal assets. Moreover, limited liability means that the owner(s) may not be held liable for debts that exceed their investment in the enterprise. For example, if your investment in your venture is $5000 and you manage to incur business debts of $8000, you are potentially liable for only the $5000.
Furthermore, there is no separate tax on the LLC. All income and expenses “pass through” to the owner(s), who pays personal taxes only on the net profit, based on share of ownership.The owner of a single-person LLC does not file a separate business tax return; all financial information is reported on Form 1040.
Schedule C Profit and Loss for a Business must also be filed, where one may deduct all of the allowable pre-tax business expenses, such as advertising expenses, travel and entertainment, office supplies, etc. LLC operators also pay self-employment tax, as do Sole Proprietors.
Property can be owned by an LLC and if that property increases in value, your LLC will avoid the capital gains double taxation that corporations incur should the property be sold, or the business entity is liquidated. Like expenses and profits, capital gains will “pass through” to the owner(s).
Be mindful that when operating a separate legal entity, that entity cannot become entwined with your personal finances. Keep your grocery store charges, shopping sprees and vacations out of business affairs. Failing to do so will cause LLC status to be forfeited. Moreover, an LLC terminates if an owner retires, resigns, dies or goes bankrupt (remaining owners can form a new LLC).
The LLC works best in relatively straightforward enterprises, whether single- or multi-owner. If your goal is to raise money to vastly expand operations, you are advised to incorporate, so that investors will have the security of holding stock certificates as proof of their ownership stake. Ditto if you plan to take your company public.
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