Author Topic: switch from sole proprietor to LLC?  (Read 2150 times)

TheBeeKeeper

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switch from sole proprietor to LLC?
« on: October 27, 2017, 08:07:01 AM »
Both my spouse and I are employed full time and run a small business. It is currently sole proprietorship with no employees (only under my name, and not the spouse).
We make honey, beeswax candles and skin creams, and I have business liability insurance of course.

So does it make sense to switch to LLC? I got a bit worried mostly because we have rental properties and other assets that I want to protect.
I did some reading and it isn't very clear to me what are the  costs involved in registering + complications in tax filing
My business is fairly small, and I want to keep things simple

TexasRunner

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Re: switch from sole proprietor to LLC?
« Reply #1 on: October 27, 2017, 08:22:51 AM »
In to follow.  Sorry I have no advice as I am in a similar position.

:)

topshot

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Re: switch from sole proprietor to LLC?
« Reply #2 on: October 27, 2017, 12:33:14 PM »
It may depend upon state rules. In Indiana, I started my sole-prop as an LLC simply by filing out the form from the Sec of State, which then needs to be renewed every 2 years. Costs about $23 each time. No change in taxes, you just list LLC name on Sch C instead of your's.

Now if you're going to add employee like your wife, I couldn't say. Clearly more tax stuff though.

jpdx

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Re: switch from sole proprietor to LLC?
« Reply #3 on: November 01, 2017, 08:35:43 PM »
LLCs are state-level entities, so the cost and process for setting one up depends on where you live. An LLC should protect your assets, and assuming it's a single-member LLC, you taxes will be exactly the same.
« Last Edit: November 01, 2017, 08:40:32 PM by jpdx »

FIKristen

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Re: switch from sole proprietor to LLC?
« Reply #4 on: November 01, 2017, 09:57:17 PM »
I considered LLC vs sole prop and ultimately decided to stick with the sole prop. Also have rental properties. The sole prop was less hassle, and when I really dug into what an llc protects against, I realized that my assumption that an LLC would protect my assets simply by virtue of being an LLC was misplaced.  Getting additional personal liability coverage provided just as much assurance, with a whole lot less paperwork.

NOLO had a good overview, pay attention to what an LLC does not protect you against.  https://www.nolo.com/legal-encyclopedia/limited-liability-protection-llcs-a-50-state-guide.html

You may find it is still worth it for you, but in my case, it wasn't.   


TheBeeKeeper

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Re: switch from sole proprietor to LLC?
« Reply #5 on: November 02, 2017, 01:49:04 PM »
thanks for the replies!

I'm in NY, my CPA said the tax filling is exactly the same as sole proprietor, just need to pay another 25$ filling fee once a year.
As for registering an LLC, I'll have to do some more reading and see if it makes a difference for our state and situation
thanks for the link to the article at NOLO!


TexasRunner

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Re: switch from sole proprietor to LLC?
« Reply #6 on: November 02, 2017, 04:20:19 PM »
thanks for the replies!

I'm in NY, my CPA said the tax filling is exactly the same as sole proprietor, just need to pay another 25$ filling fee once a year.
As for registering an LLC, I'll have to do some more reading and see if it makes a difference for our state and situation
thanks for the link to the article at NOLO!

FYI, you may want to wait for the tax code to shake out.  There may be some additional taxation changes that benefit/restrict certain things.  Anything at this point is speculation-  but realize that the potential for change is in there and some states the LLC process is non-reversible.

:)

feelingroovy

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Re: switch from sole proprietor to LLC?
« Reply #7 on: September 16, 2018, 01:35:24 PM »
I am also in NY.

My lawyer told me that you need an LLC when you're at risk of getting sued. He said my business didn't need one until I hired employees as employees are litigous. My clients probably we're not. 

Some businesses do have litigous clients though so need to go LLC right from the start. The example he gave was wedding vendors. Apparently brides sue.

skiersailor

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Re: switch from sole proprietor to LLC?
« Reply #8 on: September 20, 2018, 05:02:04 PM »
Look up "pierce the corporate veil."  If you use business funds to pay personal expenses or you don't record board minutes or you commit financial fraud or do anything else that demonstrates there isn't really a distinction between the business and your personal life, then an LLC designation won't protect your personal assets from business creditors.  You can be sure that the first thing a plaintiff's attorney will try to prove is that your LLC isn't legitimate so they can make a claim against all of your personal assets as well.  This just means that it's not enough to file the LLC paperwork - you also have to treat the company as a separate entity on an ongoing basis.
« Last Edit: September 21, 2018, 07:23:00 AM by skiersailor »

Maccountant

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Re: switch from sole proprietor to LLC?
« Reply #9 on: September 21, 2018, 02:15:25 PM »
I am a CPA licensed in New York. Setting up an LLC in New York is trickier then most other states because New York has a public notice requirement. Filing the forms with the secretary of state costs about $235, but then you have to give public notice of the formation of the LLC, the law was written before the dawn of the internet and has not been updated since, so the criteria for public notice is taking out a classified add in two county wide papers, with one publishing daily and the other weekly for a period of 6 weeks. After 6 weeks the papers issue an affidavit certifying you met the publishing requirement. Then you send the certificates into the secretary of state along with another $50 (gotta love NYS, they get you for everything). At this point you have a properly formed LLC.

As you can imagine the publishing costs can vary widely depending on what county you are publishing in. For an upstate county it can less than $200. For NYC area it can be more than $1500. So in NYS it's the publishing costs that get you.

For tax purposes, as long as the business stays a sole proprietorship - it is considered a single member limited liability company (SMLLC). Single member LLC's are considered "disregarded entities" for tax filing purposes. Thus, no change in the way you file your tax return - still a Schedule C, just with a LLC name on it. There is a $25 "franchise fee/tax" due for the LLC every year (to NYS of course), but that is the only additional tax you need to pay for an LLC.

Does an LLC protect against liability? Or is the shroud of protection as thin as a wet paper bag? That is a question an attorney can answer, but most attorneys I talk to go through the trouble of setting up the LLC for their clients. If the LLC was worthless, then why would they bother? As long as you operate your business appropriately and conduct your transactions "at an arms length" I suspect it becomes much harder to prove a "piercing of the corporate veil". Also, liability insurance and an LLC are not mutually exclusive. Why not both?


jpdx

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Re: switch from sole proprietor to LLC?
« Reply #10 on: October 06, 2018, 12:19:57 AM »
Wow, setting up a LLC in NY sounds terrible! That requirement must be great for the publishing industry but has no public benefit. In Oregon it's just $100 to register a LLC and you can do it online in 15 minutes.