Friday, November 9, 2018

Should I Form An Sole Proprietorship or LLC?

How should you organize your new lawn care and landscaping business? This is a question that is brought up many times each year on Lawn Pros, a Facebook group that I'm active in. There are four ways startups can organize as: sole proprietorship, partnership, limited liability company (LLC), or a corporation. This decision should be made very early since it determines taxes, licenses, and many other aspects of your business.





Your business will most likely start out with only you as the owner/operator, but with success, you may become busy and need to hire some employees. Depending on your location, you may service areas across state lines. This can cause a small headache and require your organization to be reassessed. An LLC is the best choice for a lawn care and landscaping business. It can be setup just the same as the first three that I listed. A corporation starts getting a little messy, but I'll explain all four below!

Sole Proprietorship

This is a business that is owned and operated by one person. You'll only need to acquire the correct licenses in your state, county, and city to begin operation. The owner of the sole proprietorship should also obtain a certificate of assumed name, or as they call it in Ohio, a "Trade Name". In Ohio, the Secretary of State files these. Your state may be different.

The sole proprietor controls all of the business assets. As the owner, you'll receive all of the business profits and/or losses and report them on your personal tax return. In this method of organization you, as the business owner, undertake all risk of the business to the extent of your assets, business or personal. This is VERY important to understand. A sole proprietorship has NO LIMIT of liability should there be a lawsuit, bankruptcy, or any other type of claim against the business. All of these claims will extend to all of your personal assets once the business assets have been exhausted. For this reason, I do not recommend a sole proprietorship.

Partnership

A partnership is a business that has two or more people join to operate a business. Each person contributes time, money, property, labor, etc and is expected to share profits and losses of the business.

While a partnership agreement isn't legally required, it's definitely recommended in case disputes later on happen so that they can be avoided as your business grows. The agreement should define how the partners contribute as far as money, assets, and management. The agreement should be specific on each partner's share of profit and loss.

The partnership should obtain the same type of trade name certificate as a sole proprietorship. Please also note, that a partnership also contains the same liability as the sole proprietorship.

Corporation

A corporation is an association of individuals with a separate legal existence. A corporation is recognized by law as being an original legal entity apart from the individuals that own it. A good way to state it is, think of it as a separate person that can contract agreements, be in lawsuits, and have unlimited life.

The corporation is created by the authority of the state government in your home state (or where the primary business operations will occur). Corporations are created by the contribution of money and/or property by the prospective shareholders in exchange for stock in the corporation. Unlike a partnership, the corporation's financial and management structure is required to conform to your state's regulations.

A corporation is also taxed as a separate entity, unlike a sole proprietorship and partnership. With a corporation, it's entirely possible to be taxed double (double taxation). This is when there are corporate income taxes as well as tax on dividends received. There's many ways to shield you from this, one specifically that it popular is election of S-Corp status.

An S-Corp is a pass-through entity just like a sole proprietorship, partnership, and LLC. These entities are NOT subject to income tax. They're taxed by your personal income tax return.

Limited Liability Company (LLC)

A limited liability company is my recommendation for a lawn care and landscaping business that's just starting out. It's very flexible in terms of the structure. It can combine concepts of sole proprietorships, partnerships, and even the corporate structures. It's a legal entity that provides the liability needed to it's owners. The LLC is organized at the state government level.

An LLC is unincorporated, so it's not a corporation, but when it comes to liability, it acts as one. When tax time rolls around, you'll be pleased to know that an LLC is taxed through your personal income tax return rather than standing chance at double taxation like a corporation. It's much more flexible in nearly all aspects of business and is very well suited for businesses with a single owner.

An LLC can also elect to be treated as a corporation for tax purposes, but I wouldn't recommend it.

Final Thought

If you're looking for a business organization that will suite you for years to come, I highly suggest forming an LLC. It shelters you in the event of a lawsuit unlike a sole proprietorship. I started by business as a sole proprietorship and looking back, I was stupid for accepting that kind of risk. What if I were to somehow hit a gas line and blow up a house? I'm now stuck paying for a house! Yes, I know that's unlikely, but plan for the worst, and hope for the best. With the "pass through" taxation that an LLC has, you won't be double taxed and the forms for filing are fairly simple for a CPA to complete for you.

Disclaimer: I am NOT an attorney. Do not take any advice from this blog as legal advice. This is purely business experience that I wish to share with you. Save yourself time and money in the long run and hire an attorney that can steer you in the right direction and even file everything for you!


Looking for the Facebook group I'm on? Check out Lawn Pros on Facebook!


















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