LLC or Sole Proprietorship?

[3tails]

I'm getting to the point that I will need a business license soon and I was thinking of forming a Sole Proprietorship for my business but I'm not fully sure if I should form a Sole Proprietorship or an LLC. Apparently you can't incorporate a Sole Proprietorship into an LLC: you must pick one or the other! Which one should I get?

My situation
I'm in the USA in the state of Virginia. I am not married and have no kids. I may marry someday but plan on never having kids (I hate kids). I live in an apartment and have no outside investments past my business stuff.

Currently most of my business' money is made selling digital items on Ebay, but I do make some in cryptocurrency as well. Laws out here see cryptocurrency as "personal property" for tax purposes so (as I understand it anyway) it's sort of like reselling antiques in the eyes of the law. My profit margin on sales is usually 25-30%. I keep track of general sales and losses in a spreadsheet done up in chunks like in the example below.

Example of how I keep records:

Net profit: 17.95
Current Spent: 57.55
Gross earnings: 75.50

12/19/2014 | Coinbase | -50 | bought BTC
12/20/2014 | Ebay | +75.50 | daily sales
12/20/2014 | Ebay | -7.55 | Ebay fees

General goals
I'd like to hire on family members to help with order fulfilment, but I'm not sure I'll need the help any time soon. I plan on expanding the cryptocurrency side greatly in the coming year. I know I won't need help with the cryptocurrency things. I'm currently planning on putting 30% of profit away for taxes, 50% back into the business, and will take no more than 20% for myself.

Things On My Mind
I know LLCs can do nifty tricks like paying myself in order to be taxed based on my "income" or an LLC can give some protection if I ever get sued, however, they are a lot more expensive all around. They cost more to start, cost more to file taxes, cost more in tax rates, and are more time-consuming to both start and run due to requiring a lot more detailed paperwork and a lot more red tape. Chances are my record keeping is not detailed enough for an LLC. I know that Sole Proprietorships don't have as many tax-lowering tricks and I won't be able to write off investments in the company like with an LLC (Or can I? It was unclear!), but a Sole Proprietorship is a lot simpler to run with less detail required in everything. Should things go wrong or I decide to do something else, it's much easier to end a Sole Proprietorship than an LLC as well.


So, what do you think, guys? Which one should I go with?

 

[Checkmate]

If you don't even have a business license yet you shouldn't even be considering a LLC.

 

[3tails]

If you don't even have a business license yet you shouldn't even be considering a LLC.

The business license application actually asks if this is going to be an LLC, corporation, Partnership, or Sole Proprietorship. It's literally the first question they ask on Business OneStop (the state business registration tool). Yes, they are making me choose this early!



I also have to turn in a business classification form to the city that asks the same question and that form is required to have a business license in this city. There's no getting around it- I need to figure this out before I even officially start. It's a huge decision to make so early which is why I figured I'd ask for advice.

I hate that they won't let me change my mind without starting over from scratch. Sole Proprietorships can't be turned into an LLC later so I'd have to dissolve my Sole Proprietorship and start over if I decide I want an LLC instead.

 

[GlobalSolutions]

I'd go with an LLC for the reason you are able to add additional members. Who knows, there may be a partner deciding to join you later.

 

[kypso]

I also have to turn in a business classification form to the city that asks the same question and that form is required to have a business license in this city. There's no getting around it- I need to figure this out before I even officially start. It's a huge decision to make so early which is why I figured I'd ask for advice.

I hate that they won't let me change my mind without starting over from scratch. Sole Proprietorships can't be turned into an LLC later so I'd have to dissolve my Sole Proprietorship and start over if I decide I want an LLC instead.

IMO I would start as an LLC because it gives you a better protection and a limited liability compared to a sole proprietor. For the business classification - if you are based in the USA they ask for an description of your business which usually includes also the IRS business activity code. You can look up the code here http://www.naicscode.com/ - for instance if it would be web designer then the code is 541511 ( http://www.naicscode.com/default.asp?Q=web+design ) .

K.

 

[Illini]

IMO I would start as an LLC because it gives you a better protection and a limited liability compared to a sole proprietor. For the business classification - if you are based in the USA they ask for an description of your business which usually includes also the IRS business activity code. You can look up the code here http://www.naicscode.com/ - for instance if it would be web designer then the code is 541511 ( http://www.naicscode.com/default.asp?Q=web+design ) .

K.

In your case (small LLC) this is the main difference and it may not seem important now but should something arise you don't want them coming after all of your personal assets.

That being said from what you've described it doesn't sound like you would ever be taking on debt or doing something that may prompt someone to sue you. So you may find the extra protection of an LLC unnecessary.

So it mostly comes down to taxes and I know with small or one person LLC's its taxed on a pass through basis to the owner's income so you would probably pay very similar taxes with either a Sole Proprietorship or LLC.

 

[hiero717]

If you are as small as you described and creating a headache like this over starting a business that cant be a good thing to bring your business to life, no offense of course. I'm no motivational speaker or try to be a guru, I would love for you to succeed just dont beat yourself up over your first company. I would recommend an LLC to separate yourself from your business. If you have steady income flowing in and worried about getting hammered on taxes then file for an s-corp its a 2553 form I believe. That way you can pay yourself a base salary and if you have a good month you can take out a dividend and get taxed at your current salary with a k-1 form. When my accountant went over this with me a few years ago he kept saying this is what all the big guys do. Another reason to separate yourself is to get trade accounts and develop a business credit score with the ultimate goal of business lines of credit. Of course dont take any strangers advice and run with it, do your research a little more and actually speak to an accountant.

So just to go over you situation. On their business one stop, first register the name, I'm sure it will take a day or two to make sure the name is okay in your state. Once you're approved on your name in your state go to the irs site and register for an EIN number under your business name and entity type and you can also get the 2553 form, with that EIN you open your company bank account to separate from your personal. If you are worried about getting sued look into getting a bond for your business. If your credit score is good you can get a 50k bond for under a G. I know I went over some stuff you didnt ask about, I have been doing this for a long time for myself and clients and I have learned some hard ways. Best of luck with your new venture.

 

[Shadexpwn]

In most states you can have a one person LLC and file the balance sheets on your individual tax return with your personal identification number.

If you really wanted to save on taxes you could migrate to places like Florida or Nevada, but you could always take a trip and setup a bank and business there if you prefer the benefits without much change in your lifestyle.

Since i'm young I chose to move everything to Florida when I finish school because I don't like how my state taxes are at the highest rate in the country.

Regardless, a one person LLC is your best bet for your individual circumstances.

 

[crzycicada]

Another vote for LLC. In TX, I'm pretty certain you can't have a single person LLC; two person minimum. Look at an LLP to see if this suits you in the short term.

 

[SinfulPromotions]

Man, I personally like the LLC model... BUT

you need to get with a CPA to determine what's best for you. They know the answers to life.

 

[DSNYC]

Only a CPA can tell you the answer to that. It's worth spending a few dollars upfront instead of getting burned in the future.

 

[timothywcrane]

I would agree with looking into an S corp formation AFTER talking to a lawyer and a CPA (the LLC to S route, You do not usually need to follow C to S formation). If you can not afford either, then stay a sole prop. You will just be adding a hassle and expense for no need. If you are looking for investors, and PLAN on making little or no money at the beginning, then an S-corp might be just what a tax laden investor is looking for. VA is a rather tax burdened state, have you considered filing elsewhere? Go to your local SBDC and see if you can get a legal consultation for free if you are broke. Most of the their info they give you is geared to small business (5-100 employees) and not micro businesses and SP as yourself, so take their info (or lack thereof) with a grain of salt. I have certain benefits through local business dev. orgs locally or I myself would relocate on paper.

You have many more choices than you might think being virtual. Just research SAs (overseas corp type, esp. latin America) as well as foreign bank rates, laws, free trade agreements, etc...

Local formation is often the best option for many, but it is not your only one.

I also see that you are interested in the income pass through and liability protection of an LLC. Starting out, these might not even apply if you need vendor help or other investment. Most will ask for a personal guarantee of liability. The age old advice is NEVER give a personal liability. At the beginning without business built assets, it might also be read NEVER need money.

Again, talk to a lawyer and a CPA. Never listen to me. I only act intelligent on the internet. In my real life I have done many dumb things!!!

 

[vagnerprestige]

I would say LLC just because of the extra protection it offers. with sole proprietorship you can get in some really big trouble.

LLC is just a good safe bet.

 

[gordop]

Not sure what type of digital products OP is selling, but an LLC might be better to help protect him if there are any copyright actions arising out of the stuff he sells.

 

[GlobalSolutions]

Not sure what type of digital products OP is selling, but an LLC might be better to help protect him if there are any copyright actions arising out of the stuff he sells.

Yes, LLC has member protection benefits.