After 10 years and 5 Employees, Sole Proprietorship Gets Upgrade
Many of our business formation clients are like “Joan”, who came in to our Oakland office to talk to us about incorporating her bookkeeping business. Joan was in her late 50s and had had a good job in the accounting department of a large corporation for more than 20 years. As a manager, she had autonomy, enjoyed her team and her 401k and benefits. She had planned to work there until she retired at 65.
Employer’s involvement in housing market resulted in loss of job
Unfortunately, Joan’s employer was peripherally connected to the housing industry, and the company was affected by the market failure of 2008. Joan never saw it coming when her boss called her into his office and told her that her job was being eliminated. Her six-month severance package helped, but the fact remained that she was a single mother with a mortgage and two kids in college, and now she was jobless in a very bad economy.
Joan updated her resume and began applying for jobs, but they were few and far between. She had a few interviews but never made it to the second round. Within a few months, she faced the reality that she might not find another job, and she couldn’t afford to continue looking. She knew she needed to start her own business. Accounting was what she knew, so she created a website, formed a Sole Proprietorship and launched her new bookkeeping practice.
Ten years later . . .
Joan’s business is thriving. She has two fulltime employees and several part-time people who help out during tax seasons. She knows that her Sole Proprietorship is no longer robust enough to address the needs of the business she owns today. She wanted to create an LLC because of the liability advantages.
The benefits of an LLC
Protected assets.LLCs provide limited liability protection to their owners (members), who are typically not personally responsible for the business debts and liabilities of the LLC. Creditors cannot pursue the personal assets (house, savings accounts, etc.) of the owners to pay business debts. Conversely, in a Sole Proprietorship or General Partnership, owners and the business are legally considered the same—so that personal assets are vulnerable.
Pass-through taxation.LLCs typically do not pay taxes at the business level. Any business income or loss is “passed-through” to owners and reported on their personal income tax returns. Any tax due is paid at the individual level.
Heightened credibility.Forming an LLC may help a new business establish credibility with potential customers, employees, vendors and partners because they see you have made a formal commitment to your business.
Limited compliance requirements.LLCs face fewer state-imposed annual requirements and ongoing formalities than other forms of incorporation, such as S or C corporations.
Flexible management structure.LLCs have become popular in the last few years because they may have a simpler organizational structure, unlike corporations which have a board of directors who oversee the major business decisions of the company and officers who manage the day-to-day affairs.
Few restrictions.There are few restrictions on who can be an LLC owner or how many owners an LLC may have (unlike S corporations).
LLCs may have some potential disadvantages:
Transferable ownership.Ownership in an LLC is often harder to transfer than with a corporation. With corporations, shares of stock can be sold to increase ownership. Typically with LLCs, all owners must approve adding new owners or altering the ownership percentages of existing owners.
Less precedent.Because the LLC is a newer type of business structure, there is not as much case law or legal precedent for LLCs as there is for corporations.
Have you been considering changing your business structure to a corporation or an LLC?