LLC Vs Sole Propietorship
Let's talk about LLC's versus sole proprietorships. Maybe this is a term you've heard before, maybe not, but here is the difference. An LLC or a limited liability company, is something that you can register with your state. So, it is registered with your state. It's a business entity that you set up that's separate and distinct from yourself and you're gonna see how that's significant in just a moment. So a limited liability company is something that you can go online, you can search, you can see who owns what LLC's, you can form an LLC, and it's completely registered and searchable and usually it renews every single year. So, the LLC is like creating a whole new person, it's not a person per say, but it's like a whole new entity we call it in the legal world, that becomes separate and apart from you. So this new entity, this new person if you will, is the one who's taking over responsibility now for any kind of liabilities, or financial crisis. As you can imagine that's really, really...
helpful because you don't wanna be the one who's absorbing all of these things. You don't wanna be the one who has your personal assets on the line. A lot of us would much rather prefer that our business is the one that is taking responsibility for the actions that we take in our business as business owners. And so an LLC is the thing that allows you to do that. You can even have a separate line of credit just for your business. So Dominique Broadway is talking more about this in her presentation and I encourage you to check out that segment of hers. But your business is completely, totally separate and apart from you if you manage it well as an LLC. Completely separate liability, we talked about that. And if you have any kind of business partners we'll talk about why this is significant in just a bit, but there is no longer a partnership. You guys become managers of this new entity together and that's really significant if you want to stay separate and apart from your partner which means that you are not absorbing their liability, you are not absorbing their financial risks that they are taking which could be happening in the default. So let's talk about the default. The sole proprietorship is the default entity or a partnership if there's more than one of you creating this business together and have not formed an LLC yet. So the sole proprietorship is completely by default, it already exists, you tell your friend you wanna have a business and you have a sole proprietorship. There is no separate legal entity to absorb any kind of financial risk or liability risk if that's something to consider in your business. So for example if you're a caterer, or a wedding planner, or photographer, you are the business, you are accepting full responsibility for the actions of your business. When you post a photo online, when you cater an event, when you forget that somebody has a food allergen, it's no longer your business that is absorbing the risk, it's you personally and your personal assets, like you house, like your car, like any savings accounts that you have because the business is not created by an LLC. It's just your assets. Your company is the credit's company as well if you don't have an LLC. So what this means is that if you want to apply for any kind of business funding, or bring on any kind of funding partners, or loans, that they are going to be looking at your credit. And again, in Dominique's presentation she's going to be talking about how to establish business credit so I'm not gonna talk about that here. But, an LLC does need to be formed in order to establish that separate entity who has that distinct and separate credit from your personal score. I think I have said this already a ton but just to hammer it home, your actions, the things that you do in your business or if you have a partner the things that your partner does, even without your permission, are all your fault, or benefit if it's a good thing. It's all falling onto you. So if your partner goes out there and they spend $20 000 on some new camera equipment and you had no idea that they even did that, they skip town and the credit card bill comes, guess who gets to pay that? You do because as partners without an LLC, you guys are both separately and equally responsible for the actions of the other person. So it's not the business who is responsible for paying that credit card bill, it's you or your partner or if they are just MIA, you're the one who's on the hook for that. This can be a little bit problematic as well as you can imagine if there is an increased chance for any kind of liability where you're interacting a lot with clients and person. I gave the example of a caterer before where the food allergens can come up. So if you are not acting as an LLC, if you are just a sole proprietorship, or a partnership, you are taking all of the liability for any actions that you have in your business and that means that if you mess up, you are personally liable. If they are suing someone, they're suing you, they're not suing your business as an LLC. And the one last thing that I wanna distinguish between the two is that if you are an LLC, and we're gonna talk more about this in just a minute, you are going to have an election for a different tax filing purpose if you start to make enough money. That might be a great idea. Whereas if you stay as a sole proprietor, or a partnership, you are not going to have the ability to potentially reduce your tax burden. And as you can imagine that can become very costly at a certain point. And then finally, if you are a sole proprietorship, you must file FICA taxes. So this is the Federal Insurance Commission Act, I believe it stands for, and you have to file those if you are a sole proprietorship. If you are an LLC there are other options. So you might not be filing FICA taxes you might be paying payroll taxes. So let's talk about that in just a second. All right, here is a big myth that I wanna dispel right away before we get further into the content. As an attorney, I am looking at your LLC in a totally different way than an accountant is. And so a lot of people come to me all the time and they say but Christina, my accountant said that I don't need to care about an LLC yet, I'm not making enough money. I'm barely turning a profit. This is just a hobby business. And my response is always that that doesn't matter from a legal perspective. Your accountant isn't looking at an LLC as that separate entity who can potentially help you out of legal trouble later on. They're just looking at it from a financial perspective. So if your accountant tells you that you're not making enough money yet, or you don't have enough financial assets to care, or your tax liability isn't an issue, again, baby steps. If you're just catching pieces of this keep going with it because this is all going to come together as you practice it. If your accountant is telling you those kinds of things, it might still be worth looking into whether an LLC is a good fit for you because from a legal standpoint it could still be protective of your personal assets and it can still help you in certain other ways even it it's not helping you financially with your taxes.