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Published -
- August 1, 2019
- 6:48 pm
Should you be a Sole Proprietor or LLC?
What is a “business entity” and how do you know which to choose? When I started in private practice I had no idea what sole proprietorships or LLCs were, and chances are you might be in a similar place! Don’t worry, in this video I’m going to break down these entities to help you understand how to move forward in private practice.
What is a business entity? It’s a legal categorization that helps define what type of business you run for tax and liability services. The business entity you file for helps the IRS know what kind of relationship you have with your business.
The main factors to take into consideration when selecting a business entity is how it will impact your liability and your taxes.
There are an array of possible business entities to enter into. However, there are two that are most common in solo private practice: Sole Proprietorships and Limited Liability Companies.
To cut to the chase: I personally believe filing as an LLC is the best option, which will make sense as we get into it.
Okay, let’s explain the differences as well as pros and cons of each of these.
Sole proprietorship:
-this is kind of the default business entity. If you’re licensed to practice as a therapist in your state, and you have a city business license, BOOM, you’re a sole proprietor. There’s no extra paperwork to fill out. You simply have to keep track of your income and file taxes appropriately.
-If you are a sole proprietor, you and your business are legally considered to be the same entity. That means that when your therapy business makes income, it’s the same as you making income. You and your business are the same unit.
-Pros: The pros of being a sole proprietor are that it’s easy to manage, there aren’t additional costs to file, and no additional taxes to pay above and beyond your typical income tax.
-Cons: You are held liable for all of your business dealings! This is a HUGE con. What this means is that if you get sued for something that happens related to your professional practice, someone can go after your personal assets like your house or car, because you and your business are the same entity.
-Liability insurance doesn’t resolve this issue as it only covers your professional assets and also doesn’t apply in an array of situations, particularly if you lose a law suit.
Limited Liability Company (LLC):
-There is a little bit of application process to become an LLC, but it could be reasonably completed in a day or two.
-If you file as an LLC, you and your business are considered separate entities.
-Pros: Limited liability! This means that if someone sues your business, your personal assets are protected! People cannot go after your house or car. Similarly, If someone sues you personally, they can’t go after your business assets either.
-Taxes! Unlike some of the other business entities that offer limited liability, filing as an LLC does not require that you pay double on certain taxes. If you file as an LLC, you can opt to file taxes as a “pass through entity,” which allows profit and loss to go straight to the business owner and only pay taxes on those profits once.
Cons: There’s a bit more upkeep here. It’s imperative that in addition to the initial application process, you are diligent about keeping your business and personal bookkeeping separate. You need separate bank accounts in order to make clear that your business and personal money are separate entities. If you don’t do so and aren’t diligent about keeping a paper trail of your costs, it can be easy for someone to claim in a lawsuit that you are effectively not running like an LLC. This is called “piercing the corporate veil.” Basically, you could go through all the work and still be held personally liable.
What are the liability issues associated with sole proprietorship and how can they impact the personal assets of the business owner?
Starting a business can be a daunting task, especially when it comes to deciding on the legal structure for your company. The two most popular options for small businesses are sole proprietorship and limited liability company (LLC). Both have their own benefits and drawbacks, so it’s important to weigh your options and choose the legal structure that fits your business needs. In this article, we’ll explore the pros and cons of both sole proprietorship and LLC.
Sole Proprietorship
A sole proprietorship is the simplest and most common legal structure for small businesses. It’s a one-person business where the owner is fully responsible for all its liabilities and debts. Here are some of the pros and cons of choosing sole proprietorship:
Pros
The key benefit of a sole proprietorship is its simplicity. It doesn’t require any registration or filing fees, nor does it require any complicated documents. As a sole proprietor, you have complete control over your business and can make quick decisions.
Another benefit is that you don’t have to pay separate business taxes. Instead, you report the business profits and losses on your personal tax return. This simplifies the tax process and may result in a lower tax rate.
Cons
The biggest disadvantage of sole proprietorship is the liability issue. Since you and your business are not separate entities, you will be personally responsible for all the debts and obligations. Any lawsuits or legal issues can result in you losing your personal assets.
Also, as a sole proprietor, it can be hard to raise capital. Lenders may be hesitant to lend you money because of the high-risk factor involved.
LLC
A limited liability company (LLC) is a popular legal structure for small businesses. It provides some of the benefits of a corporation but is easier to set up and maintain. Here are some of the pros and cons of choosing LLC:
Pros
The biggest advantage of an LLC is the limited liability protection it offers. As a member, you are not personally responsible for the company’s debts or legal issues. This means your personal assets are protected in case anything goes wrong.
Another benefit is that an LLC can have multiple members, allowing you to split the management and ownership responsibilities. It also allows you to raise capital by selling ownership shares to other members.
Cons
The biggest drawback of an LLC is the cost involved. It requires registration and filing fees, and you may also need to hire a lawyer to draft the operating agreement. Additionally, you will have to pay separate business taxes.
Another disadvantage is the complexity involved. As a member, you will have to comply with the legal requirements and file annual reports. This requires more paperwork and can be time-consuming.
Conclusion
Choosing the right legal structure for your business is an important decision. As we’ve seen, both sole proprietorship and LLC have their own pros and cons. It’s important to weigh them carefully and choose the structure that fits your needs. If you’re just starting out and want a simple, low-cost option, sole proprietorship may be the way to go. However, if you want more protection and flexibility in managing your business, LLC may be worth the extra cost and effort. Whatever you choose, make sure to consult a qualified attorney or tax advisor to help you make an informed decision.
