Selecting a Business Structure as a “Solopreneur”

Selecting a business structure as a solopreneur is less complicated then you might think. While there are plenty of confusing terms out there, such as “liability protection” and “tax structures,” you really have one decision, that of sole proprietor vs. LLC.

Sole Proprietor vs. LLC

For the single business owner, or “solopreneur,” there are really only two viable choices for structuring the business: sole proprietorship and limited liability company (LLC).

Sole Proprietorship

A sole proprietorship is the easiest business to set up. In most states, if you conduct business under your own surname, you already ARE a sole proprietor (for example, “Wile E. Coyote’s Demolition Services”). Technically, it is not a legal entity, and only refers to the business owner (and the person responsible for its debts).

Fictitious Name Registration:

If Mr. Coyote wanted to operate as “Desert Demolition Services,” he’d have to register a fictitious name with the state. Registering a fictitious name allows you to do business as (DBA) a name other than your legal surname. There is usually a cost to register that name with the state, and in Pennsylvania, it can be quite high. However, having a fictitious name does not reserve it exclusively for you. If the Road Runner, ever wary of the Coyote, decides to form “Desert Demolition Services, LLC,” he’d be able to use the name freely, leaving the Coyote flattened.

Taxation:

Revenues, expenses, and losses are all reflected on the individual’s tax returns.

Liability Protection:

A sole proprietorship offers no liability protection to the business owner. If the business is sued, all of the owner’s personal assets are at risk (car, home, retirement and college savings…everything). A business with a physical location or employees, or that sells a service or a product that might malfunction, should strongly consider a formal business entity. Given Wile E. Coyote’s track record with faulty products, he might consider an LLC to limit his liability.

Limited Liability Company

A limited liability company is one of the newest legal structures. It provides the liability protection of a corporation, and the owners can elect how the entity will be taxed. LLCs are member- or manager-managed, and “single-member LLCs” are quite common. For these reasons, LLCs have become quite popular.

Name Reservation:

As mentioned above, when you register a legal entity with the state (LLC, Corporation, etc.), you reserve that name. As long as the company is in good standing or existence, the name cannot be taken from you. If Wile E. Coyote registers “Desert Demolition Services, LLC,” the Road Runner would have to choose another name, perhaps ACME, Inc.

Liability Protection:

As the name suggests, a limited liability company limits the liability of the owners. As long as the entity is in good standing, and has a responsible registered agent, in the event of a lawsuit, only the business’ assets are at risk. Nine times out of ten, this is the biggest reason for forming any legal entity.

Corporate Formalities:

With a single-member LLC, there are surprisingly few. They require an operating agreement, an annual meeting, and in some states, an annual report or tax. If you’re the only owner, the annual meeting is quite relaxing; take yourself out to lunch! Check with your state to determine initial and ongoing requirements.

How much does an LLC cost to start?

The state fees range widely, from Massachusetts’ $500, to Colorado’s $1. Your state is somewhere in the middle. However, the benefit of limited liability usually outweighs the cost of starting and running an LLC.

Taxation:

An LLC offers flexible taxation. It can be taxed either as a sole proprietorship, as above, or as a S-Corp, by filing Form 2553 with the IRS. We’ll discuss in more detail the differences between an LLC and an S-Corp in another post.

This concludes the first comparison in the series. As always, the decision is ultimately yours. With this information, and your knowledge of your business, you are better equipped to start!