Sole proprietorship vs coorporation

Currently I am a hobby business and unless the business makes more than $10K a year I don’t have to worry about declaring as a SP or Corporation. I have a Doing Business As registered with the state.

The way it was explained to me is that once you form a corporation, you can form what is called an LLC, limited liability corporation, which limits your liability to $1 million. As an SP you would be open to a law suit for almost any amount. Also a corporation is a registered business and your name is protected, etc. I don’t think a SP shares that kind of copyright protection. A corporation is a federally registered business where as a SP you are not as visible.

Going as either business you will probably want to look into insurance. When I looked into it was quite expensive, which is why I like dealing with the galleries, their insurance picks up the coverage for customer purchases. The gallery might then go after me, which is why I usually have contracts with the galleries that spell out who is liable for what.

There may be different tax things too, but better find a CPA to answer that.

Some business colleges have free “Business assistance centers”. I was able to go in and get all of my questions answered, free forms, etc. But that was a couple years ago and I don’t remember all the details.

-- Rich, WNY, www.nyrockingchairs.com

Hi Dave;

That’s really a question for your accountant. Being a sole proprietor has a number of disadvantages, regarding liability. You personally are on the line.

It does offer some advantages, but my own thoughts are in favor of corporations. In particular “S” corporations allow you to operate much in the same way as you do now, while offering you corporate protection.

It is imperative that everything you do, sign, agree to is done in the name of the corporation, or the corporate veil is easily pierced.

The strange thing is if the corporation does get sued, you will probably be sued as well as an individual. I never really understood the reason to be incorporated if they sue you personally anyway.

Which brings me to if you do incorporate, make sure you personally are added to the insurance policy as also insured. Here there is no charge for naming also insured. When I get a building permit in Philadelphia, I have to have a certificate of insurance sent to the city, which names the city as also insured.

Now I guess I should explain that getting sued does not necessarily mean your a bad guy. For example, I got sued when one of my trucks was stopped at a stop sign. A drunk lady stepped off the curb and into the side of the stopped truck. She fell down. The driver got out to see if she was okay. She was quite embarrassed and said several times, my fault, my fault, I’m sorry.

The next day her daughter called wanting the name of my insurance company. Apparently it was my fault.
She sued me, but got nowhere.

I have been sued a few times, and always for something along those lines. And often the insurance will just pay small claims to save the expense of litigation. That really irritates me.

Keep in mind I am not an attorney or accountant and am merely passing on my experiences!

Sorry I got carried away, AGAIN.

Lee

-- by Lee A. Jesberger http://www.prowoodworkingtips.com http://www.ezee-feed.com

Hi Dave,
As an attorney and business law teacher, I can tell you that many corporations that are formed now are the “S” corporation or a form of limited liability corporations. The advantages are that 1) you can limit your liability to the assets of the corporation and 2) you report the income or profit on your individual tax return (so no corporate income tax. As to the insurance question, that depends on the insurance agency, but for liability sake a corporation is a much better option.
Mike

Going corporate opens you to every kind of government intervention. Workmen’s comp. matching funds, OSHA, insurance compliance, etc., etc. Miss your quarterly’s by a day and the IRS will be sure to penalize you.

Anybody can sue anybody for any reason. Corporate or not you don’t protect yourself much unless you go big. Having multiple employees and stuff.

Consult accountant and attorney. Probably LLC if you’re really making a go of it. Otherwise, trust your wife, put everything in her name and minimize yourself. If “they” want to take stuff from you, they will, no matter what. You’re fooling yourself if you think you can protect yourself with large financial backing.

-- arborial reconfiguration specialist

Sole proprietorship means you and the business are one. Corporation means the business has its own identity. In some areas, such as borrowing from a bank, being a corporation signals that you might be more serious about the success of the business and therefor more “bankable”. In other areas, such as law suits, it can signal that you have taken steps to limit personal risk and might be tougher to beat in court.

It’s more expensive and there are more rules for corporations, so the size of the business, the riskiness of the markets, number of employees, and lots of other factors such as taxes have to be considered. It kind of matters what your goals are.

-- Rich, Seattle, WA

Dave,

I’ve been in business as an S-Corporation (not a woodworking business, however) and am now setup as a Sole Proprietor for my woodworking (just decided to take the plunge this year as a part-time venture).

Before you take the plunge into becoming a Corp, you might want to spend $20 on this “June Walker’s” (:http://junewalkeronline.blogspot.com/ ) book “Self Employed Tax Solutions”. It’s brilliant and could help guide you in deciding which path is best for you.

Dan

Note:
LLC means “limited liability company” not “limited Liability corporation”. The rules for an LLC vary from state to state. The IRS will generally accept your State’s rules and definitions. However, they (IRS) may also allow you to file as a disregared entiity as if you were a sole prop.

There is much more to your decision than just the cost of health insurance.
Seek professional advice.

Yep, I’m a tax consultant, but this is all the free advice you’ll get from me. <grin>

-- Randy (P), rustic wood crafts, Morning View, Kentucky

as others have said you as an individual are somewhat protected in a corp. the big savings in a corp come when the corp makes more than 50K. you pay yourself a salery. there is a minimun. I think the minimum is 15K. may be more. I’m not sure because the accountant handles all that. you save because you only pay social security on your salary. the rest you pay yourself in dividends. you still gotta pay taxes on all profit after write-offs but SS is a large bill! of coarse its wise to start your own IRA because SS is based on what you pay in and by saving now you wont be collecting as much at retirement. at least thats how I understand it! :-} as far as lawsuits are comcerned I dont know as I’ve never been sued but if the corp has no assets they aint gettin diddley.

skeez

-- hey honey! watch this!

The bank thing was a good note. One thing my boss has seemed to forget about was the corporation making a profit instead of us just covering our salaries. If you were going to go big, it would be important for the corporation to make a profit. When you go to a bank to expand, they’ll see that the “company” is profitable and would have the ability in and of itself to make payments on a loan.

With a corp. you can also get double taxed. The corp gets taxed on its income, then you get taxed on your income. You get taxed on your inventory, you have to pay sales tax depending on how you do your work. Of course it depends on what state you live in.

You might try googling “rich dad poor dad” or something. There’s this guy that has put out a couple of books about investing and business. One of them was about corporations and was pretty good.

-- arborial reconfiguration specialist

My cpa is currently changing me from an SP to an LLC. Seems to be the safe thing for my small 1 man shop.

-- I want to know Gods thoughts....rest are details "A. Einstein"

Woodn88s:

1. A single member LLC offers little to no protection if YOU do the work. YOU are still personally liable. Ask a lawyer about the liability part, not a CPA. LLC’s (and the various corporate structures) are more helpful with partners, employees, sub-contractors, vehicles not driven by you, and pieces of business real estate.

To the others:

2. A single member LLC makes no difference at all to the tax man, etc… Your taxes still get reported the same way, you earn all the income, and you own all the stuff. I’ve heard the term “pass-through entity” used to describe a single member LLC relating to money and taxes.

Ask some successful local businesses in the same line of work who they use for legal and accounting advice, pay for an hour of time from both specialties, and go get the real skinny exactly as your locale lays it out.

-- - Real men read directions

Dave,

If you lived on Florida I would be more than willing to offer whatever information that I would be able to provide, but I have no clue as to the Texas laws that govern things such as LLC, Type S – vs – C Corporations, workman’s compensation Insurance, Liability Insurance or Bankruptcy Codes.

Unfortunately you will encounter customers that do not understand what they want, or feel that they understand the craft better than event the most skilled master, in addition to the occasional slime-ball interior designer. In the end it really comes down to protecting yourself, and making sure that you receive you are fairly compensated for your skills as a tradesman.

The best advice that I can provide is to go to a local college and use their west law, or lexis service to gain an understanding of how things “work” in your state. Once you have learned everything that you can, I would call the Texas Bar Association. Tell the Bar that you are in the process of creating a custom woodworking business, and would like to have an informational session with an qualified Attorney (Member of the Construction Board) for a few hours, to answer questions about Insurance, Structure ( Sole Proprietorship -vs- LLC – vs – Sub S –vs- Sub C) Lien Laws, and professional liability, and that you need help in revising your standard package of contracts and documents. This will probably cost you $1,2000 (figure $300 an hour), so be direct and tell them that you want statutory form letters, and a model contract

Construction Law is extremely nuanced and is a specialty, your run of the mill Attorney will be as familiar with Texas Construction Law as I, and as I previously mentioned I have no clue about the laws governing construction in your state, o it is worth an Extra $500 or so to speak with a person that has the qualifications to advise you.

1) A Type “C” Corporation is a legal entity that pays taxes, for all intents and purposes it has the same legal recognition as you or I, except that a Federal Tax ID is issued instead of a Social Security Number, and a Type C Corporation is viewed for all intents and purposes as a living breathing person, just as you or I.

A Type C corporation does not have an Owner, only shareholders and officers. In your case, you would be the sole shareholder, as well as its sole employee and officer. These are actually two separate and distinct jobs, because (1) The shareholders nominated you to be on the board of directors, you accepted the nomination, and you received a majority of the votes; and (2) The board of directors hired you as an employee.

The easiest way to think of this type of business entity is to imagine that you worked as a machinist on an oil rig for one of the major oil companies for the past 10 years, and had .00000000000000000001 percent of the stock in your 401K, and after 10 years of practicing your art were elected by the other shareholder to serve as the CEO if the company. Unless you have an MBA, office work on a fulltime bases in not really a very satisfying occupation, so you decide to work 40 hours a week as a machinist and 20 hours as week as CEO. This is conceptually the same as when you hear someone described as CEO and President, in that they have an office (CEO) which they were elected by the shareholders, and an employee (president)

The reason that a C corporation offers so much protection from liability is that an officer or employee of a C – Corporation can not be personally named as a defendant to a lawsuit against a corporation, except for instances in which a Officer fraudulently conveyed assets of the corporation to evade the collection of a judgment. It is up to the corporation to sue the officer or an employee to recover any damages that the shareholders incurred as a result of the officers or employees misconduct. This means that if you have a corporation with basically no assets, after all employees and officers are not cheap, (especially when there are deferred compensation obligations), the employees own all of their own tools, drive their own cars, etc… that you as an employee or officer can not be made a defendant merely because all of the Corporations profits were expended to cover your salaries and expenses.

Subtype “S” Corporation, is a synthetic entity, that does not pay taxes, and is owned (in other words your Social Security Number is the legal identifier of the Company) . Theoretically, a S corporation offers less protection from personal liability than a S corporation, but more than a sole proprietorship, but in reality it is basically nothing more than a sole proprietorship with a fictitious name that is on file with the state, (MR Y DBA (doing business as X custom cabinetry). The reason that I say this is because there is no legal distinction between either Owners and Shareholders; or Officers and Employees – and they are considered to be one and the same.

LLC are not even recognized in all states, and the states that do have LLC’s can not be generalized, they just very way to much, in some states they are nothing more than a way to simplify business structures by allowing a limited partnership to be incorporated as a C-Corporation, rather that having the managing member of a LP being the Officer of a corporation that is the managing member of an LP. In the Limited Partners are viewed as passive investors and have complete immunity from any liability, and the General of managing partners have all the protections that an Officer of a C corporations would have, except in relation to the limited partners.