"Tip of the Week" - Sole Propietor, S Corporation or LLC?

When starting a solo practice I am often asked 'which entity should I use for my business?'  I'm not an accountant or a small business lawyer and I don't play one or the other on the blogosphere.  That being said, I am partial to the LLC (limited liability company) for its simplicity, speed of establishing, low cost, level of protection and ease of filing taxes because the profits/expenses pertaining to your solo practice are generally completed on a single form, the income earned 'passes through' to your personal tax return for filing purposes and you ultimately just file one tax return.

I have always had an LLC.  When I (we) first started out we were advised to think towards the future and not go into the business intending to shift from a PC to an LLC or vice versa, that this was a trigger/red flag for the IRS.  Whether true or not, we accepted the logic of the argument and went LLC from day one.

There are other schools of thought on this but this was how we operated and how I continue to operate.

There is a great article discussing the LLC at Entrepreneur.com called, 'Take Cover' which goes into further detail. 

"......many sole proprietors, who for years were satisfied with a less formal status, are seeking protection in an increasingly litigious environment. “A decade ago, it was the norm to be a sole proprietor and view incorporating as unnecessary,” says Troy Janisch of Madison.......But with greater exposure to lawsuits and more personal assets at stake as a result, many business owners are seeing the advantages to incorporating. And when faced with the choice of the LLC or its popular alternative, the S corporation, most opt for the former."

Also, here is a more 'legal' version of an LLC from fellow blogger Rush on Business although Iowa state specific information is included because...well, this lawyer practices in Iowa.  If you are looking for a knowledgable resource in NYC check out solo Imke Ratschko at New York Small Business Law for a lot of valuable information.  Bloggers such as those mentioned provide a wealth of information and are putting themselves out there to establish relationships with people like yourself as you consider your options.  These two attorneys (one solo, one not) are great starting resources.

But as always, consult with your accountant and/or a small business lawyer for the business entity that is right for your unique set of circumstances and the state in which you practice.  If your accountant or lawyer isn't really knowledgable about LLCs find one who is so you can make a truly informed decision.

Rick Georges over at Solo Lawyer continues the conversation.  Please chime in with your thoughts and ideas and experiences and expertise!!

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Comments

[Sheryl Sisk]

Great post, Susan. I would caution your readers, though, that if the primary reason someone adopts the LLC is to avoid litigation risks, it might not be all that simple. Personal assets are frequently at risk in a single-member LLC either due to personal guarantees (often required of new businesses, regardless of form) or "piercing" type actions. I am by no means an expert and am simply parroting back advice culled from others over the course of the past year or so, while I was making the decision for myself (Sole Proprietorship, purely for simplicity's sake, but that was driven in large part by my circumstances at the time which were, admittedly, complex). So, further research is definitely warranted. Then, too, corps being a creature of state law, things will be very different in South Carolina than, say, Connecticut. VERY different... but that's a whole 'nother post entirely!

[Carolyn Elefant]

I posted a guest post on this topic at this link - http://www.myshingle.com/my_shingle/2006/01/guest_post_llc_.html and it generated some comments. Most people generally followed your advice and endorse the LLC, but caution that lawyers must realize that the LLC (or any other corporate form for that matter) will not shield lawyers from personal liability for legal malpractice.

[Rush Nigut]

Nice post, Susan. It is important to remember that each business person, including the solo lawyer, may have different circumstances and therefore one entity may be better than the other for that individual. Further, the decision could vary depending on state laws. Some states may not allow single member LLCs. Getting the advice of an accountant and small business lawyer are important. Thanks for the link.

Rush