When and why to incorporate.....

[Som3a]

That is the question I've asked my SCORE counselor. Her view is: never. For no reason.

She is saying that I would pay double taxes and have no protection of personal property because if that is the reason for incorporating it would be considered fraud. I can't imagine how that could ever be THE reason for incorporating....doesn't a business have to BE a business to incorporate, in the first place?

I have operated in the black since Day One and want to grow and expand at some point, and also own a home again. My question was if I would go LLC or S-Corp, and when to do that. I know we have talked about it some here, but I need further clarity from people who have some idea about the business, hopefully even from some here who have worked as a sole proprietor and have chosen to incorporate in some form or another at some point.

 

[aaron b]

If you are practicing out of your home and/or simply sharing space, it may not be very helpful. However, if you plan to have a storefront/mobile operation featuring multiple therapists it could be very helpful to get set up as an LLC or as an S-Corp.

There are fairly specific definitions, pros and cons between sole proprietor, LLC, and S-corp. Aside from your SCORE advisor, I would speak with a small business tax accountant and/or a small business lawyer about your current situation and future plans to see what they think. Until then, read up on the differences and try to get a grasp of how each may/may not apply to you.

My partner operated a home-based business as a sole proprietor for some time, and that was the best approach for her at the time. When we joined forces to operate a large massage center with many MTs, we researched the options and formed an S-Corp. For us, the S-Corp option provided both tax and liability benefits, plus it clarified many things related to the partnership structure - ALWAYS a good thing when you have multiple owners!!

How you incorporate may also have a strong impact on your future business options. For example, an LLC can only operate one type of business. It can't own and run both a massage center and a separate Mary Kay franchise. (But you could have a massage center that retails Mary Kay, if you chose.) Therefore you should write out what kind of business you wish to have and all the details of its operations that you can think of. This will help your advisers better understand your desired business model so they can tailor their advice appropriately for your needs.

Hope that helps!

 

[Pauline]

I have been mobile the entire time - almost 5 years. I do not need to change my legal structure right *now*.....but do intend to own a building for the business later, eventually renting out a room or two. I have read quite a lot about structuring and know either LLC or S-Corp would work, C-corp would not work for me. I'm not one to go into things blindly, (I have been accused of thinking things to death, though) so I'm trying to figure it all out now. I was expecting her to ask more questions and help me decide which way to expect to go so I can be planning everything for that, but instead she just said no, incorporating won't work, won't do any good, it will just cost a lot more money.

Which, may in the end be true.....but I would have to know HOW I got to that conclusion. What she says isn't jiving with what I've read. And I just don't trust anyone with a fast conclusion of any sort, lol.

 

[Nirvana Veggie balls]

For example, an LLC can only operate one type of business. It can't own and run both a massage center and a separate Mary Kay franchise. (But you could have a massage center that retails Mary Kay, if you chose.)

Jason...

Mind letting me know where you got this info from.

We have an LLC, and I can elaborate later as to why... but our atty did not have a problem with us running two "types" of "services" out of one LLC. It is all in how the bylaws are written up.

Our LLC is not a "massage named" business, but a general named business --- looks sort of like a law firm and we practice two seperate types of work within the business (massage and another health care related field). We have the ability to add martial arts to the practice as well.

So, maybe that is a particular quirk regarding establishing the business in the first place? I'd be interested to get a little more info on where you are coming from, as our information is obviously different than yours.

 

[Nurse For 20 Years]

Okay, so the two of you who have responded have gone with LLC. Was it *only* because you are multiple therapist operations with a storefront location? Only because you are multiple therapists, regardless of the location?

Is it true that if you are the owner of the business, there is no protection of personal property? Why would it be called limited liability if there is no limit to the liability? What is this SCORE counselor talking about?

 

[dallenmarket]

Sharon,

We decided to go with a PLLC (professional limited liability company). In our state, that is supposedly "required if an individual is required to hold a license to render services". Our CPA said that he has MT clients who go with the regular LLC and others who've done the PLLC. I'd never heard of a PLLC until I went to set this one up on the secretary of state's web site.

With the PLLC, we can't do more than one type of business (couldn't, for instance, run both a massage and a chiropractic business), but, as he said, we could have TWO side-by-side PLLC's. Since we're not currently interested in any other type of business, and we did go with a "massage themed" name, it made sense to be "safe rather than sorry" sort of thing.

I would, however, seek a "second opinion" regarding what your SCORE counselor has told you. What she says does not seem to add up, according to what I've learned in my research in this endeavor, as well as what our CPA said. That is the whole purpose of an LLC- to render some protection to the individual. It wouldn't keep you from, say, having to pay a debt you've incurred, even if you do go out of business, but it could offer you protection if some sue-happy client should happen to decide that you have deep pockets. With the LLC, if everything has been done and signed in the name of the business (very important, as the CPA explained), then the ONLY recourse they'd have would be to sue the LLC, rather than YOU. That's where the protection comes in.

I hope this helps and isn't too confusing!

 

[aamirzz]

...Was it *only* because you are multiple therapist operations with a storefront location? Only because you are multiple therapists, regardless of the location?

Is it true that if you are the owner of the business, there is no protection of personal property? Why would it be called limited liability if there is no limit to the liability?

I only had the option of going with an LLC, because my husband was from another country at the time and because we practice different professions (he and I are both MT's... I am also licensed otherwise as another health care practitioner).

If we could have, my personal preference would have been a PC (private corporation) although I can't tell you why (it just seemed simpler than what we had to do at the time), which you can do if you have two professionals practicing together with the same licenses only - or at least that was the case in 2004, when I changed from the DBA to the LLC.

I put some money into finding a good attorney to get this done, so much of what I can tell you is just a general understanding and it may not be helpful to your personal situation. I spent over 8 years as a DBA.

Granted, I don't have much, so it really isn't like the LLC makes that much of a difference in the event we're ever sued - and yes, we pay a heck of a lot more taxes than we did ------ but, we did have some concerns regarding the business so we went ahead and did this. To be sure, I wouldn't have probably incorporated for another 10 years/maybe ever(!), had I stayed single.

Regarding your question about limited liability: the answer is following in the second quote.

• Limited liability - the owners of the LLC, called "members," are protected from liability for acts and debts of the LLC.

Gonna provide you with a site which may help (with quoted matierial below): http://www.limitedliabilitycompanycenter.com/articles.html

What is an LLC?
A limited liability company (LLC) is a relatively new business entity, at least in the United States. Its basic features are that its owners have limited liability for the entity's debts and obligations, similar to the status of shareholders in a corporation, and its income and losses are normally passed through to the owners as if it were a partnership. It is probably most like a limited partnership, without the requirement that there be at least one general partner liable for the debts and obligations of the partnership.

An LLC is a statutory creation. That is, unlike general partnerships which developed under common law, an LLC, like a corporation, is created by filing a document (usually called Articles of Organization) with an officer designated by state law.

LLC Advaneforum.xxxes
A limited liability company (LLC) has many advaneforum.xxxes as a form of business entity:

• Pass-through taxation - under the default tax classification, profits taxed at the member level, not at the LLC level (i.e., no double taxation).
• Limited liability - the owners of the LLC, called "members," are protected from liability for acts and debts of the LLC.
• With "check-the-box" taxation, an LLC can elect to be taxed as a sole proprietor, partnership, S-corp or corporation, providing much flexibility.
• Can be set up with just one natural person involved or, in some states, one owner which may be an entity itself.
• No requirement of an annual general meeting for shareholders (in some states, such as Tennessee and Minnesota, this statement is not correct).
• No loss of power to a board of directors (although an operating agreement may provide for centralization of management power in a board or similar body).
• LLCs are enduring legal business entities, with lives that extend beyond the illness or even death of their owners, thus avoiding problematic business termination or sole proprietor death.
• Much less administrative paperwork and recordkeeping.
• Membership interests of LLCs can be assigned, and the economic benefits of those interests can be separated and assigned, providing the assignee with the economic benefits of distributions of profits/losses (like a partnership), without transferring the title to the membership interest (i.e., See VA and Delaware LLC Acts).

LLC Disadvaneforum.xxxes
While a limited liability company (LLC) offers many advaneforum.xxxes over other forms of business entity, there are also some disadvaneforum.xxxes. Some of the drawbacks to selecting an LLC over another entity are:

• Earnings of most members of an LLC are generally subject to self-employment tax. By contrast, earnings of an S corporation, after paying a reasonable salary to the shareholders working in the business, can be passed through as distributions of profits and are not subject to self-employment taxes.
• Since an LLC is considered a partnership for Federal income tax purposes, if 50% or more of the capital and profit interests are sold or exchanged within a 12-month period, the LLC will terminate for federal tax purposes.
• If more than 35% of losses can be allocated to nonmanagers, the limited liability company may lose its ability to use the cash method of accounting.
• A limited liability company which is treated as a partnership cannot take advaneforum.xxxe of incentive stock options, engage in tax-free reorganizations, or issue Section 1244 stock.
• There is a lack of uniformity among limited liability company statutes. Businesses that operate in more than one state may not receive consistent treatment.
• In order to be treated as a partnership, an LLC must have at least two members. An S corporation can have one shareholder. Although all states allow single member LLCs, the business is not permitted to elect partnership classification for federal tax purposes. The business files Schedule C as a sole proprietor unless it elects to file as a corporation.
• Some states do not tax partnerships but do tax limited liability companies.
• Minority discounts for estate planning purposes may be lower in a limited liability company than a corporation. Since LLCs are easier to dissolve, there is greater access to the business assets. Some experts believe that limited liability company discounts may only be 15% compared to 25% to 40% for a closely-held corporation.
• Conversion of an existing business to limited liability company status could result in tax recognition on appreciated assets.

Comparison of LLC and Corporation
LLC vs S Corporation



A few other items that may help, from a very long page entitled How Limited is Limited Liability?

Is Limited Liability an Illusion?
Although it may seem that the exceptions swallow the rule, the LLC offers excellent protection from many types of liabilities. For example if you properly hire and train an employee who then commits an act of negligence or fraud, the LLC should shield you from personal liability. If you sell a product that, without your knowledge or fault, is defective, you should not have personal liability. Trade creditors who deal with the LLC without a personal guarantee should have no right to look to you for payment.

Shoring up Limited Liability
There are several things that you can do to strengthen the protection of limited liability within the LLC:

Business insurance. Carrying adequate business insurance won't change the fact that you are personally liable for your own negligence, but it can help by providing a source for payment. You might also consider a personal umbrella policy.

Avoid personal guarantees. Not all personal guarantees can be avoided but do not automatically consent to every guarantee. In many cases, landlords or vendors routinely request personal guarantees even where the facts do not dictate that one be provided. Learn to question the request.

Capitalize the business adequately. Provide adequate capital for the entity's intended purposes and document the capital infusion.

Keep the LLC separate from your personal business. No matter how small the business is, it should have its own bank account. Don't pay personal expenses from the business account. Instead, write yourself a check (called a draw) on the LLC account and deposit it in your account from which you pay expenses. Likewise, don't use personal checks to pay LLC bills. If the LLC needs funds, make a capital contribution or loan. And account for everything.

Act ethically. Don't attempt to mislead the LLC's creditors about the financial condition of the business.

Do not divert assets. If the business looks like it is going down, don't attempt to lessen your own loss by taking big draws or moving assets out of the LLC. That will only help open the floodgates to your personal assets.

If you act responsibly and take a few precautions, the limited liability of the LLC is still a major benefit over a sole proprietorship or general partnership.

Those pages also address the following questions:

• What is a Series LLC?
• What is a Single Member LLC?
• Single Member Limited Liability Companies with Employees
• Single Member LLC or Multiple Member LLC?

 

[Det. John Kimbel]

When and why to incorporate.....

That is the question I've asked my SCORE counselor. Her view is: never. For no reason.

She is saying that I would pay double taxes and have no protection of personal property because if that is the reason for incorporating it would be considered fraud. I can't imagine how that could ever be THE reason for incorporating....doesn't a business have to BE a business to incorporate, in the first place?

I have operated in the black since Day One and want to grow and expand at some point, and also own a home again. My question was if I would go LLC or S-Corp, and when to do that. I know we have talked about it some here, but I need further clarity from people who have some idea about the business, hopefully even from some here who have worked as a sole proprietor and have chosen to incorporate in some form or another at some point.

Her SCORE = 0. That is the worst advise with the flimsiest reasoning I have ever heard.

There is no 2x taxation. In fact, incorporating can provide many tax advaneforum.xxxes. #1 -- you can pay yourself a dividend out of the profits instead of taking all the loot as salary. Salary is subject to the full range of taxes. Dividends are taxed at a much lower rate -- at least until the leeches in DC rewrite the tax code. #2 -- you can set up a retirement program that is much more generous than you can as an SP, which also lowers your tax burden.

You can inc or LLC and elect to be treated as an SCorp for tax pruposes.

 

[<barbierox>]

Thanks, everyone. I've come to the same conclusion as R&R on the counselor......why on earth would it be called a Limited Liability Corp, if there is no limit to the liability? And everything I've read makes sense with what is said here and is opposite to what she says.

I'm not jumping into anything, but goodness, I'd like to get past the first question! :O