Disregard - I think I have it. I'll post info about this subject as I learn it. It sounds like for now it's sole proprietorship.
business LLC vs Sole Proprietorship vs ???
- Thread starter Lucky Dog Hot Sauce
- Start date
Advantage of a LLC
Owners are not personally responsible for company debts.
This is the most important attribute of an LLC. In a sole proprietorship and partnership, the owners are personally responsible for business debts. If the assets of the sole proprietorship or partnership cannot satisfy the debt, creditors can go after each owner's personal bank account, house, etc., to make up the difference. By contrast, if an LLC runs out of funds, the owners are usually not liable.
Disadvantage of a LLC
Cost of set up.
LLCs cost more to set up and run than a sole proprietorship or partnership. For example, there are the initial formation fees, filing fees and annual state fees. These costs are partially offset by lower insurance costs.
Formal organization.
Although an LLC requires fewer formalities than a corporation, there is still more paperwork involved than a sole proprietorship or partnership. A sole proprietorship or partnership can open and operate without any formal organizing procedures - not even a handwritten agreement.
Separate records.
In order to maintain the separate form of the LLC and maintain the liability protection of its members, LLC owners must carefully maintain separate records and keep personal affairs separate from the LLC's business. Even more importantly, the LLC's money should never be intermingled with personal money.
Owners are not personally responsible for company debts.
This is the most important attribute of an LLC. In a sole proprietorship and partnership, the owners are personally responsible for business debts. If the assets of the sole proprietorship or partnership cannot satisfy the debt, creditors can go after each owner's personal bank account, house, etc., to make up the difference. By contrast, if an LLC runs out of funds, the owners are usually not liable.
Disadvantage of a LLC
Cost of set up.
LLCs cost more to set up and run than a sole proprietorship or partnership. For example, there are the initial formation fees, filing fees and annual state fees. These costs are partially offset by lower insurance costs.
Formal organization.
Although an LLC requires fewer formalities than a corporation, there is still more paperwork involved than a sole proprietorship or partnership. A sole proprietorship or partnership can open and operate without any formal organizing procedures - not even a handwritten agreement.
Separate records.
In order to maintain the separate form of the LLC and maintain the liability protection of its members, LLC owners must carefully maintain separate records and keep personal affairs separate from the LLC's business. Even more importantly, the LLC's money should never be intermingled with personal money.
Thanks - I'd read that SBA page several times but it doesn't really say/recommend anything though, which I understand. It's also a bit tricky since I'm using a co-packer, which limits my liability significantly. Since the biggest impact of the decision (LLC vs sole proprietorship) has to do with personal liability, that alleviates that concern a bit.
I just spoke with a family friend, an attorney. The fact that I can start it as a sole proprietorship now and convert it to an LLC later if needs be is the determining factor.
That page/info from the SBA is also misleading, in that having an LLC doesn't necessarily shield your assets. Plus any company you do business with will likely have you sign contracts, not your LLC, so the liability is on you for contractual purposes as well.
For now I'm going with the sole proprietorship at the recommendation of the family friend - it will allow me to register the company with the county/state and to promote the product and hit the ground running with farmer's markets/web sales as soon as I have manufactured product in my hot little hands.
And if it takes off and the income justifies it I'll consider converting it to an LLC.
The biggest benefits to an LLC are that when it comes to tax time, you're much more easily covered with write-offs since all capital is segregated - separate bank accounts, tax forms, etc. It also creates more expenses, including the $800+ annual charge to maintain the LLC status. It is also expected to shield your personal assets, but as mentioned, this is somewhat bogus. If someone's going to come after you, they come after you, and in a single-person LLC it's apparently not a good shield at all.
The family friend commented that a sole proprietor starting out with an LLC status is a bit of an ego thing - taking a wait and see approach as a sole proprietor carries extremely limited risk.
Hope this helps anyone looking at this!
I just spoke with a family friend, an attorney. The fact that I can start it as a sole proprietorship now and convert it to an LLC later if needs be is the determining factor.
That page/info from the SBA is also misleading, in that having an LLC doesn't necessarily shield your assets. Plus any company you do business with will likely have you sign contracts, not your LLC, so the liability is on you for contractual purposes as well.
For now I'm going with the sole proprietorship at the recommendation of the family friend - it will allow me to register the company with the county/state and to promote the product and hit the ground running with farmer's markets/web sales as soon as I have manufactured product in my hot little hands.
And if it takes off and the income justifies it I'll consider converting it to an LLC.
The biggest benefits to an LLC are that when it comes to tax time, you're much more easily covered with write-offs since all capital is segregated - separate bank accounts, tax forms, etc. It also creates more expenses, including the $800+ annual charge to maintain the LLC status. It is also expected to shield your personal assets, but as mentioned, this is somewhat bogus. If someone's going to come after you, they come after you, and in a single-person LLC it's apparently not a good shield at all.
The family friend commented that a sole proprietor starting out with an LLC status is a bit of an ego thing - taking a wait and see approach as a sole proprietor carries extremely limited risk.
Hope this helps anyone looking at this!
Hey Luckydog,
I'm not a lawyer, but I am a law school graduate who concentrated in business law, so I do have a little knowledge in this area. If you're going to be selling your sauces in stores, a lot of places require that you have liability insurance. There was a good thread on here recently discussing different policies. I'll post the link to that thread on the bottom. It looks like The Hartford has pretty reasonable policies (someone had a $4 mil policy for $550/year, another person purchased a $1 mil policy for 600/year). If you are a small producer, insurance costs could really cut into your profit margin, but it would be far more damaging if you're uninsured and someone gets extremely sick, or dies. In terms of liability of the co-packer vs yourself if someone gets sick, California has joint and several liability. This means that the plaintiff could sue both of you and as long as you're at least partially liable (even deemed to be 1% liable), you can be forced to pay the entire award of economic damages. You could then sue the co-packer for contribution and recover their proportion of liability, but along with that comes more lawyer fees, court fees, etc.
In choosing between an LLC and Sole Proprietorship the main concerns are formalities of formation, taxation and liability. A sole proprietorship requires no formal documents to start, while the LLC in California is subject to a $20 startup fee, which is due within 90 days of formation. Under a sole proprietorship, any profits will be taxed as regular income for you. In California, an LLC with a single member is taxed as if you're a sole proprietorship unless you choose to be taxed as a corporation, but I believe you still have to pay an $800 yearly LLC tax to California. If you choose to be taxed as a corporation, you have to fill out form 100-ES. This election wouldn't be a good idea since you're not going to have any employees. Corporations can deduct the salaries of its employees from their taxes. Any income you generate outside of your salary would be a dividend taxed at both the corporate and personal level. You could give yourself a decent, tax deductible salary (at the corporate level), which would be taxed via your normal federal return, but if you give yourself too high a salary the IRS is going to be extremely unhappy; not a good thing. In terms of liability, you'd be personally liable under a sole proprietorship, so your personal assets would be at risk. Under an LLC, as a limited owner, your liability would only reach company assets. However, there are a few exceptions to limited liability. If you personally commit a tort, you would still be personally liable. If you negligently hire or supervise your employees (not applicable to you if you aren't going to hire any of course) you would be personally liable. You would also be personally liable if you or your agent make contracts in your personal capacity. This often happens when people start making contracts before they have properly formed the company.
In choosing between Sole Proprietorship and LLC, the size of your company is central to the decision. The larger your company is (or you plan to make it), the more it makes sense to form an LLC. If you aren't selling too many units, it might not be worth it to pay that $800 a year LLC tax, but if you choose to operate as a Sole Proprietorship, make sure whatever liability coverage you get is extremely comprehensive.
http://www.thehotpepper.com/topic/22314-food-liability-insurance/page__hl__insurance
I'm not a lawyer, but I am a law school graduate who concentrated in business law, so I do have a little knowledge in this area. If you're going to be selling your sauces in stores, a lot of places require that you have liability insurance. There was a good thread on here recently discussing different policies. I'll post the link to that thread on the bottom. It looks like The Hartford has pretty reasonable policies (someone had a $4 mil policy for $550/year, another person purchased a $1 mil policy for 600/year). If you are a small producer, insurance costs could really cut into your profit margin, but it would be far more damaging if you're uninsured and someone gets extremely sick, or dies. In terms of liability of the co-packer vs yourself if someone gets sick, California has joint and several liability. This means that the plaintiff could sue both of you and as long as you're at least partially liable (even deemed to be 1% liable), you can be forced to pay the entire award of economic damages. You could then sue the co-packer for contribution and recover their proportion of liability, but along with that comes more lawyer fees, court fees, etc.
In choosing between an LLC and Sole Proprietorship the main concerns are formalities of formation, taxation and liability. A sole proprietorship requires no formal documents to start, while the LLC in California is subject to a $20 startup fee, which is due within 90 days of formation. Under a sole proprietorship, any profits will be taxed as regular income for you. In California, an LLC with a single member is taxed as if you're a sole proprietorship unless you choose to be taxed as a corporation, but I believe you still have to pay an $800 yearly LLC tax to California. If you choose to be taxed as a corporation, you have to fill out form 100-ES. This election wouldn't be a good idea since you're not going to have any employees. Corporations can deduct the salaries of its employees from their taxes. Any income you generate outside of your salary would be a dividend taxed at both the corporate and personal level. You could give yourself a decent, tax deductible salary (at the corporate level), which would be taxed via your normal federal return, but if you give yourself too high a salary the IRS is going to be extremely unhappy; not a good thing. In terms of liability, you'd be personally liable under a sole proprietorship, so your personal assets would be at risk. Under an LLC, as a limited owner, your liability would only reach company assets. However, there are a few exceptions to limited liability. If you personally commit a tort, you would still be personally liable. If you negligently hire or supervise your employees (not applicable to you if you aren't going to hire any of course) you would be personally liable. You would also be personally liable if you or your agent make contracts in your personal capacity. This often happens when people start making contracts before they have properly formed the company.
In choosing between Sole Proprietorship and LLC, the size of your company is central to the decision. The larger your company is (or you plan to make it), the more it makes sense to form an LLC. If you aren't selling too many units, it might not be worth it to pay that $800 a year LLC tax, but if you choose to operate as a Sole Proprietorship, make sure whatever liability coverage you get is extremely comprehensive.
http://www.thehotpepper.com/topic/22314-food-liability-insurance/page__hl__insurance
Thank you very much - lots of food for thought there! I'll pour over this when I have more time tonight, but wanted to express my appreciation!
I don't think it is necessarily how big you get it is what you can afford to loose. All it takes is one person to sue you as a SP and you could loose everything including your house. If a lawyer had a choice to take on a case where they could sue a SP or an LLc which do you think they would take on first?
It is a scary world out there and the USA is the worst for sueing. I would choose an LLC first off. But up to you
It is a scary world out there and the USA is the worst for sueing. I would choose an LLC first off. But up to you
It's not that simple. A 1 man LLC has virtually no protection. If you're getting sued they're going after your personal assets regardless.
That's what I meant by the myth of the protection that an LLC offers.
It seems that insurance is a better investment for a one owner small-ish scale company.
The new thing I found out is that I may have to up my car insurance - because if you're driving to deliver sauce to the farmer's market or to a meeting w/co-packer and get into an accident, the insurance company may not honor the claim. That's lame.
mjdiamond83 and Luckydog have it right. A single person LLC will not protect you against a tort lawsuit. That's why you get insurance, so the insurance co, with all its resources, has some skin in your game...
As for financial liability... no one in their right mine is going to lend your LLC money without you personally signing surety, so again, LLC doesn't add any value there
Certainly in CA, where an LLC costs $800 per year, I don't see any benefit for a 1 person business.
Oh, and keeping your personal and business financial records completely separate is a good idea, whatever form your business entity takes.
As for financial liability... no one in their right mine is going to lend your LLC money without you personally signing surety, so again, LLC doesn't add any value there
Certainly in CA, where an LLC costs $800 per year, I don't see any benefit for a 1 person business.
Oh, and keeping your personal and business financial records completely separate is a good idea, whatever form your business entity takes.
Thanks Matanzima - I'm still learning all of this stuff myself, so validation helps.
There's a lot of bad data out there and getting specific advice for the scenario I'm going for is immensely helpful. That $800 a year was described to me as an "ego thing" for a 1-man LLC, since that's apparently the only benefit.
The other slightly erroneous/misleading bit on the SBA site cautions that a disadvantage to a sole proprietorship is that you cannot transfer business contracts if you should ever sell the business. My attorney friend said that while true, the flaw is that you most certainly can transfer trademarks, contracts and anything else as an individual to another individual or to a company - so it's really misleading.
Almost like they want to steer you to spending the $$$ for a LLC using that as a scare tactic.
Ps - mjdiamond83 is the MAN!
Agreed with most things stated. Even if you where to form say a Sub s Corp. If you do not keep your personal and business separate in every way possible, then there is a chance that you are personally liable. The courts would look to see that you were actually running your business as a business and kept everything as such. In the case that you do sign on a contract, you would be signing as the president of the company, hence the liability would still fall onto the company as long as you personally where not doing anything fraudulent. (At least that is what my understanding was when I opened up my Sub s Corp.) Good luck
I've now checked with several people - lawyers, people who studied law, my accountant and my bank manager - all advised to not do LLC for a 1 person company. It's a waste of $800/year and offers zero protection. Sole Proprietor all the way. If I need to convert later I can.
Sawyer
eXtreme
One advantage of an LLC is that the IRS is more willing to issue an EIN for an LLC than they are for a sole proprietorship. Even a single-member LLC is considered a "disregarded entity" for federal tax purposes, but at least they will issue an EIN. Some of the businesses I've signed contracts with require an EIN and won't accept an individual's SSN as a TIN. That's my experience; your mileage may vary. Then again, the annual franchise tax here is $150, much less than the $800/yr you face.
yes, I've read that. Also Small Business loans are reportedly more easily obtained by the LLC, though I've also heard debate on this subject when in reference to a 1-person LLC. There are a few other advantages too, but most of them seem to have to do with scale. If I'm looking at web-sales, farmer's markets and a select # of gourmet stores in CA, it likely doesn't justify the expense of the LLC in CA.
Sheesh - between gun laws & business stuff California really sucks.
SadisticPeppers
eXtreme Business
And one more feather in the cap of a sole proprietorship which I just discovered this morning... I can only speak fro FL, but at least here, if you set up a sole proprietorship, you're not liable for taxation on any income you make from the biz in the state of Florida. So pretty much the only income taxes you have to worry about are Federal. Does anyone else know if the same or something similar applies in other states as well?
Link: http://dor.myflorida.com/dor/taxes/corporate.html
Link: http://dor.myflorida.com/dor/taxes/corporate.html
salsalady
eXtreme Business
Sounds like you are referring to a state income tax. Oregon has an income tax, Washington doesn't. Everyone has federal income tax. But as a business, there are many deductions that help. If you are a successful business and actually make money, you still have to pay about as much or more than if you're an employee. It's just not as painful when it's taken out of your paycheck than having to sit down and write a check for $,$$$ to the IRS.
SadisticPeppers
eXtreme Business
Yeah, was referring to state income tax. I realized just now what I wrote was clear as mud, but FL and a couple other states, as it turns out, don't have income taxes on sole proprietorships