Breaking away from the 9-5, being your own boss, and living the life of a “solopreneur” is extremely rewarding. However, as a first time business owner, you might feel overwhelmed. Understanding legal vocabulary, tax structures, and liability protection is not easy, even for veteran entrepreneurs.
For a single business owner, structuring the business properly is extremely important, in order to limit your personal liability and to be taxed appropriately.
As you review business entity options, you’ll find the two most viable are the sole proprietorship and the limited liability company (LLC).
Of these two, only the LLC provides the benefits and advantages your business needs to succeed:
1) Name reservation: If you register a fictitious name with the state as a sole proprietor, the name is not reserved for you. In other words, someone wishing to register an LLC or corporation under the same name can take it from you. If you register an LLC in the first place, your name will be reserved.
2) Limited Liability Protection: This is the big one. You want your personal assets to be protected in the event of a lawsuit. As a sole proprietor, you are faced with unlimited liability, meaning your home, car, and savings, can be targeted and seized. If you form an LLC, only the business’ assets are at risk, as long as the entity is in good standing.
3) Simple Taxation: As a single-member LLC, you are taxed as a disregarded entity. In other words, you disclose the business’ financials on Schedule C of your annual 1040, which is exactly the same as if you were a sole proprietor.
4) Easy to set up and run: The state fees to set up an LLC range from $1 in Colorado to $500 in Massachusetts. You must draft an LLC operating agreement. Annually, you must hold an organizational meeting (so take yourself out to lunch!), and depending on your state, pay a franchise tax, file a report, or both. While this is a bit more work, having a reserved name and liability protection is absolutely worth it.
5) Credibility: Having “LLC” at the end of your business name adds legitimacy to your business. It shows that you’ve taken the time and appropriate steps to register with the state, and that you are a responsible business owner.
Ultimately, selecting a business structure is up to you. While an LLC is an excellent choice for “solopreneurs,” always consider your financial situation, resources, and plans for growth.
Disclaimer: Harbor Compliance is not an accounting or law firm and does not provide tax, financial, or legal advice.