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Should Your Business Be an LLC or Sole Proprietorship?

Published: 21/02/2018
By: larry

Diane in New Jersey says:

It's tax season so I would like to know how many real estate photographers are sole proprietors vs. LLCs, or other. Maybe a poll?

Since I'm not a tax or legal expert, I did some research on the question and found Lee Phillips's Youtube channel who is an expert in this area. As Lee explains in the video above, the primary advantage of an LLC over a sole proprietorship is that an LLC separates your business from your personal assets and protects them both.

I've had my business in both forms of organization so I would have said there are no tax differences however, Lee explains that there are indeed tax benefits to an LLC. Here is Lee's video on taxation of LLCs.

[polldaddy poll=9941854]

10 comments on “Should Your Business Be an LLC or Sole Proprietorship?”

  1. An LLC doesn't necessarily provide protection of your personal or business assets. Banks and other creditors will often require the principal of an LLC to personally guarantee any loans or lines of credit. In California, the annual registration fee for an LLC is around $800 and there are filing requirements that are different from just operating as a sole proprietor.

    It's worth the money to sit down with both a CPA and an attorney to determine whether a LLC is going to offer any advantages over a sole proprietorship vs. the extra work that it might involve. You may very well save some money on taxes, but it might cost even more in accountant's and filing fees.

    https://www.youtube.com/watch?v=8oVdvWfLW40, another attorney with YouTube videos that seems to have a few nuggets of information on business operating types. A worthwhile search is "single entity LLC" if you will be the sole owner of the LLC.

  2. It goes without saying that no-one but an accountant or a tax attorney should be giving advice on what type of corporation or legal entity should be set up for any business. However, it is a very good idea to become knowledgable in the different types of entities by searching on the web for explanations and then have your tax advisor/attorney review this with you.

    Other than liability and Ken is right - most banks when looking at credit, will ask a principle to personally guarantee the loan or credit card. However, there is one really important issue to consider when choosing how to set up your business.

    The IRS requires a business to keep personal and business transactions and records separate. To this end, if you remain a sole proprietor, even if you file on a schedule for your tax return, sometimes personal creeps into business and visa versa. An LLC or stronger entity is much easier to keep everything separated.

  3. @Suzanne, keeping business and personal finances separate is important no matter what form a business takes. The best way is to have separate bank accounts and write yourself a check from the business account when you need money for personal expenses. You can even withdraw cash via an ATM from your business account if you then record that in your accounting software as salary. The key thing is to create a clear trail that is easy for a third party to figure out.

    I have always found it easy to consider my business and myself as two different entities. This is mostly since I have had several different businesses operating at the same time. If I were to just swap money around, there would be no way I could analyze if a business was doing well or if it were time to shut it down and concentrate on the other(s). In fact, I just did that last year after looking at a big drop off in income from one of my other businesses. Without a big marketing effort, that business wasn't going to bring in as much as my photography and I was sort of burned out doing it anyway.

  4. My CPA recommended that I switch from a sole proprietorship to an LLC. My first inclination was why bother since tax-wise it doesn't matter assuming that you dot your i's and cross your t's under either structure. Banks and other creditors want personal guarantees from the owners under either structure so in that respect there is little difference at the end of the day. Tax-wise, I will have to file a separate return for the LLC. Any profits are taxed as income to the Members of the LLC on our personal taxes.

    However, there is another source of financial vulnerability to me and my business that is a huge difference between the two structures.

    If I operate as a sole proprietorship and a customer sues my business for some reason and prevails, worse case scenario, the customer could conceivably take my personal assets (investment accounts, property, cash, money markets, college funds, retirement funds, etc. Might be a bit of a stretch but the law of the land and compensation is whatever a judge/jury decides).

    If I am an LLC and a customer sues my business and prevails, worse case scenario, compensation decided by the judge/jury are limited to the assets held by the LLC (cash, receivables, equipment, etc.). They would not have a claim against my personal assets (investment accounts, property, cash, money markets, college funds, retirement funds, etc.).

    The cost associated with forming and maintaining an LLC are minimal compared to the hopefully unlikely, but nevertheless potential exposure. His advice was specific to my personal situation. As others offering comments have said, you need to discuss your personal situation (including state rules and regulations) with your own financial advisors.

    Hawthorne addresses this in his video

  5. I created my LLC several years ago, and started out taxing as a single entity, because I didn't create enough income to warrant doing anything else. However, I have recently begun to file as an S-corp. In a nutshell, Henderson Images (the company) pays me (the photographer) a salary. That money is subject to self employment tax. Money above and beyond the salary is not.

    So, it saves taxes. However, you can't make the salary $100. The salary has to be in line with other photographers doing similar work in the same industry (I used bureau of labor statistics). Also, I have to keep the business VERY separate from my personal life. Separate checking account, separate credit card, etc. The business has to also issue me payroll once a month, complete with deductions, withholding, and pay stubs.

    Its a little complex, and I am paraphrasing the procedures, because the actual work is done by a very smart (and very conservative) CPA.

  6. My business is an S-Corp. It baffles me how many in this business make great money and are not incorporated. Yes it costs about $3k a year with Govt. agencies, payroll company fees, bookkeeping and CPA but the tax savings and 401k savings are significant. I spoke to a business owner the other day who grosses $390k a year, isn't in corporated and has nothing to show for his hard work at the end of the year {no-savings at all}, plus he constantly owes $30k in taxes. If you are making solid money like $80k plus you should be incorporated or have an LLC not only for the liability protection but also for the tax savings and personal savings. Just say'n.

  7. So, thank you. This came up for me because of the thoughts of business insurance that was posted some time back...and some folks said if you're going to get biz insurance, you might as well be LLC. Truth? False? mixing oranges with apples? Luckily, I see my accountant shortly, but would love some comments.

  8. So how does one structure ones businesses if they are an S-corp and making around 50k? I basically earn enough to pay my bills and have little in surplus to put away?

  9. I was in the same boat couple of years back. I went my first few years in business as a sole proprietor. Then switched to an LLC once I was sure I was going to stick with it.

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