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What's the necessity for forming an LLC when you can be a sole-proprieter? Both write-off?

Discussion in 'Business & Tax Advice' started by Monkehx, Apr 18, 2012.

  1. Monkehx

    Monkehx BANNED BANNED

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    Question above :)
    Going more in-depth, with an LLC or sole-proprietership one can write-off expenses. Why would someone want to form an LLC? I'm thinking about getting one off Legal Zoom because I heard if you're sued it protects you. But is this non-sense? Please chime in, specifically the experts, I seriously envy knowledge you guys have.
     
  2. Vyper

    Vyper Newbie

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    Hey Monkehx,

    Yes, an LLC can provide extra protection in lawsuits. Like everything legal, it comes down to the details. But, generally, this is a primary purpose of having a separate legal business entity. With a sole-proprietorship (just a local license/registration to do business, not a separate entity), you, personally are the only legal entity liable for your business in the eyes of the law. Well, actually a spouse can become liable too with a sole-proprietorship. So, with a sole-prop, if your business gets sued, then you are the one getting personally sued and all of your personal assets are at risk.

    With a separate legal entity for your business, you can legally separate yourself from business liability. So, if you properly maintain the entity, hold title to business assets & accounts within the business entity, don't mix personal finances with business finances, etc, then you have a better chance of a court limiting your liability to only within the one separate business entity and not spilling over to your personal self or other business entities you own. But, if an exception applies or you don't maintain the business like a separate entity, then someone suing you can "pierce the corporate veil" of your entity and go for all of your personal holdings.

    So I'd say establishing an LLC is worth it for that reason alone. I hold all of my businesses in LLCs.

    Another reason to establish an LLC is tax savings...

    With a sole-proprietorship, you pay about 15% in self-employment tax on top of normal income tax. If you have an LLC and do a special election with the IRS for your LLC to be taxed as an S-Corporation (form 8832), then you will only pay about 7.5% in equivalent taxes. Otherwise, a standard LLC is taxed the same as a sole-proprietorship.

    Another reason to establish an LLC is your TIN & credit...

    Under a sole-proprietorship, you'll likely just use your own personal social security number on accounts & credit, etc. With an LLC, you'll get a separate tax identification number than your SSN, which helps keep your business dealings off of your personal credit. Also, it in some cases, it can help you get higher lines of credit on accounts and higher general approval rates on opening new accounts, etc.

    I wouldn't do business without my LLCs. :)

    Hope that helps you!

    Feel free to ask me any follow-up questions.
     
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  3. volund

    volund Senior Member

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    Before you do an LLC I would have a good cpa look at your books. You may well be better off going with an S corp, it is a bit more expensive to setup but depending on your situation it may be a better choice. There is really no one size fits all and choosing the correct one can save you a lot of money long term.
     
  4. Vyper

    Vyper Newbie

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    volund... S-Corp is actually a tax election, not an entity type. So an S-Corp (tax treatment) can be elected via either a Corporation (entity type) or an LLC (entity type). Corporations take more complex overhead and state law often requires multiple people to serve as directors. LLCs were created & popularized for small businesses and don't require more than 1 person serving to legally exist. Important for doing independent BH activities.

    But, good advice about consulting with advisers on the relevant & local legal & tax issues. Corp attorney & CPA.

    Monkehx, if you're making 5 figures already, then I'd skip LegalZoom and hire your own advisers to do it custom for probably around $1,500 or so total. A lot of stuff is all standard boilerplate, where the custom decision making & minor tweaks are where further expertise & labor comes in.

    Also, before doing so, buy the LLC guide from Nolo Press and read it over to get personally familiar.

    Review things annually with CPA for tax purposes and optimize/upgrade things with attorney/CPA as you make a lot more money.
     
  5. TehEpidemick

    TehEpidemick BANNED BANNED

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    The very basic understanding is a sole-proprietorship is basically running a business through your name whereas an LLC, Limited Liability Company can be ran as a sole proprietorship but protects your personal assets from the court.
     
  6. bitencrypt

    bitencrypt BANNED BANNED

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    Liability, Limited Liability Companies (LLC) Protect your personal finances. As a member of a LLC you act for the LLC not as it. got it :) http://en.wikipedia.org/wiki/Limited_liability_company See: Advantages
     
    Last edited: Dec 12, 2012
  7. GauravJ

    GauravJ Power Member

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    Yes, LLC is amore secured form of Business enterprise in terms of risks and liabilities involved
    LLC stands for Limited Liability Corporation and as name suggests promoters are liable to upto their subscibed capital, a limited extent, whereas In case of sole proprietorship personal assets of proprietor can also be used to settle claims if required as against in LLC or company. But setting up a company and it's compliance cost are greater in comparison to Sole proprietorship business.
     
  8. ateep22

    ateep22 Registered Member

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    s-corp or c-corp is the way to go...always have an llc, ask your local accountant and he will tell you the same