Anguishing over whether to setup an LLC or stay a sole prop
Scott W
is seasonal, of course, and we are only talking about 15K to
20K income annually. I have always operated as a sole prop,
with no liability protection whatsoever. I have never had
even a hint of trouble from any customer, but of course the
potential is there, and I am getting more risk averse in my
old age. But with a limited income I am wondering if it is
worth the hassle of setting up an LLC or if I would be
better off just getting good liability insurance for this
endeavor.
One argument FOR an LLC is that my wife helps me and I
figure her assistance, based on time spent, is worth about
$5,000. As I understand, under an LLC I could allocate a
portion of the profits as a dividend of some kind to her,
thus reducing the 15% FICA bill on that dividend, which
otherwise just goes into our general fund, taxed as
everything else.
As for the liability insurance, any suggestions? What kind
do I need? I have heard of a coverage called Error and
Omissions - is this what I need?
Thanks much for any input,
Scott
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Gene E. Utterback, EA
> I have been running a tax related business since 1988. It
> is seasonal, of course, and we are only talking about 15K to
> 20K income annually. I have always operated as a sole prop,
> with no liability protection whatsoever. I have never had
> even a hint of trouble from any customer, but of course the
> potential is there, and I am getting more risk averse in my
> old age. But with a limited income I am wondering if it is
> worth the hassle of setting up an LLC or if I would be
> better off just getting good liability insurance for this
> endeavor.
>
> One argument FOR an LLC is that my wife helps me and I
> figure her assistance, based on time spent, is worth about
> $5,000. As I understand, under an LLC I could allocate a
> portion of the profits as a dividend of some kind to her,
> thus reducing the 15% FICA bill on that dividend, which
> otherwise just goes into our general fund, taxed as
> everything else.
>
> As for the liability insurance, any suggestions? What kind
> do I need? I have heard of a coverage called Error and
> Omissions - is this what I need?
With all due respect, you really should take some CPE
courses related to LLCs in general and regarding tax
treatment. NO corporate (or LLC) shield will protect you
from a personal or personally committed professional wrong.
Organizing as an LLC or a corporation won't protect YOU if
YOU make a mistake. It MIGHT protect YOU if your WIFE
makes a mistake but then it won't protect HER.
Next item - there are arguments going both ways on
allocating income from and LLC to avert SE tax. However, if
your wife is a member in that LLC and part of what whe
receives is for the services she renders then you will have
to allocate at least some of what she receives as subject to
SE tax.
If she is NOT a member of the LLC and you are the only
member of the LLC then you have a Single Member LLC and are
treated for tax purposes as a Schedule C. Additionally, if
you pay her for services rendered then she is an employee
and you STILL have payroll taxes.
In your particular case, I'd recommend you contact the state
or national accounting society you belong to and ask who
they recommend for E&O insurance. After you get a quote
from the insurance agent you should go talk to an attorney
about estate and asset protection planning. Depending on
your particular circumstances, including the complexity of
the returns you prepare AND your overall financial position,
you may find that you don't have enough liability risk or
exposure to worry about liability.
Good luck,
Gene E. Utterback, EA
DonBa
> I have been running a tax related business since 1988. It
> is seasonal, of course, and we are only talking about 15K to
> 20K income annually. I have always operated as a sole prop,
> with no liability protection whatsoever. I have never had
> even a hint of trouble from any customer, but of course the
> potential is there, and I am getting more risk averse in my
> old age. But with a limited income I am wondering if it is
> worth the hassle of setting up an LLC or if I would be
> better off just getting good liability insurance for this
> endeavor.
I was told by an attorney that an LLC does not protect you
from actions arising from your own negligent acts.
Donald Baaso
Stuart O. Bronstein
> I have been running a tax related business since 1988. It
> is seasonal, of course, and we are only talking about 15K to
> 20K income annually. I have always operated as a sole prop,
> with no liability protection whatsoever. I have never had
> even a hint of trouble from any customer, but of course the
> potential is there, and I am getting more risk averse in my
> old age. But with a limited income I am wondering if it is
> worth the hassle of setting up an LLC or if I would be
> better off just getting good liability insurance for this
> endeavor.
Most sole proprietors have corporations or LLC's for tax
purposes. In general they won't protect you against
liability for your own negligence.
In addition, many sole proprietors have a huge proportion of
their assets in their businesses anyway. So even if there's
no personal liability, losing all assets in the business can
be devistating.
From a purely liability standpoint, if you have to chose,
insurance is the way to go, in my opinion.
> As for the liability insurance, any suggestions? What kind
> do I need? I have heard of a coverage called Error and
> Omissions - is this what I need?
First check with your insurance carrier to see what they
have. Errors and omissions is essential. But you probably
also need a general liability policy. After you find out
what the agent says is available, check with a lawyer to see
that you're really getting what they are promising you.
Stu
Scott W
> Scott W wrote:
>> I have been running a tax related business since 1988. It
>> is seasonal, of course, and we are only talking about 15K to
>> 20K income annually. I have always operated as a sole prop,
>> with no liability protection whatsoever. I have never had
>> even a hint of trouble from any customer, but of course the
>> potential is there, and I am getting more risk averse in my
>> old age. But with a limited income I am wondering if it is
>> worth the hassle of setting up an LLC or if I would be
>> better off just getting good liability insurance for this
>> endeavor.
> Most sole proprietors have corporations or LLC's for tax
> purposes. In general they won't protect you against
> liability for your own negligence.
Okay, its quite clear that an LLC won't protect you. Then
where does the name "Limited Liability Corp" come from ? If
a Limited Liability Corp offers no limits on liability, then
perhaps it should be called something else? Of course, I am
being facetious, but someone please straighten me out here.
Scott
Scott W
> I have been running a tax related business since 1988. It
> is seasonal, of course, and we are only talking about 15K to
> 20K income annually. I have always operated as a sole prop,
> with no liability protection whatsoever. I have never had
> even a hint of trouble from any customer, but of course the
> potential is there, and I am getting more risk averse in my
> old age. But with a limited income I am wondering if it is
> worth the hassle of setting up an LLC or if I would be
> better off just getting good liability insurance for this
> endeavor.
>
> One argument FOR an LLC is that my wife helps me and I
> figure her assistance, based on time spent, is worth about
> $5,000. As I understand, under an LLC I could allocate a
> portion of the profits as a dividend of some kind to her,
> thus reducing the 15% FICA bill on that dividend, which
> otherwise just goes into our general fund, taxed as
> everything else.
>
> As for the liability insurance, any suggestions? What kind
> do I need? I have heard of a coverage called Error and
> Omissions - is this what I need?
It is clear from the responses that what I likely need is
E&O coverage, not more complexity from a different legal
status. Thanks for everyone's input.
Gene E. Utterback, EA
>> I have been running a tax related business since 1988. It
>> is seasonal, of course, and we are only talking about 15K to
>> 20K income annually. I have always operated as a sole prop,
>> with no liability protection whatsoever. I have never had
>> even a hint of trouble from any customer, but of course the
>> potential is there, and I am getting more risk averse in my
>> old age. But with a limited income I am wondering if it is
>> worth the hassle of setting up an LLC or if I would be
>> better off just getting good liability insurance for this
>> endeavor.
> I was told by an attorney that an LLC does not protect you
> from actions arising from your own negligent acts.
Smart Attorney - neither will any form of corporation!
Gene E. Utterback, EA
Stuart O. Bronstein
> Okay, its quite clear that an LLC won't protect you. Then
> where does the name "Limited Liability Corp" come from ? If
> a Limited Liability Corp offers no limits on liability, then
> perhaps it should be called something else? Of course, I am
> being facetious, but someone please straighten me out here.
In a nutshell:
Corporations were originally set up to limit the liability
of the owner of a business. With a corporation the owner is
only liable up to the amount of his investment in the
company, or for his own negligence. It also protects
against liability for the negligence of others (contrary to
the rule in partnerships). And it also protects against
personal liability for non-tort debts.
If the company just takes on too much debt and ends up going
bankrupt, the owners of the company don't have to come up
with their own money to pay off creditors of the company.
But corporations have a drawback for some people: the
corporation and the shareholders are taxes separately. And
to some extent, as you know (e.g. dividends) there is double
taxation.
So S corporations were established to allow the liability of
a corporation but some of the tax benefits of a partnership.
But there are some negatives of S corps for some people.
For example partnerships allow writeoffs of more than 1 for
1, but S corps don't. And the number of shareholders in an S
corp is limited. So a lot of people still weren't
satisfied.
"LLC" stands for Limited Liability Company. It is not a
corporation. It is, in fact, a fairly recently developed
entity that is set up to give the tax treatment of a
partnership while giving the limited liability of a
corporation.
Stu
Rich Carreiro
>> purposes. In general they won't protect you against
>> liability for your own negligence.
> Okay, its quite clear that an LLC won't protect you.
That is incorrect. You are misunderstanding what the
person is saying.
> where does the name "Limited Liability Corp" come from ? If
> a Limited Liability Corp offers no limits on liability, then
It DOES offer limits on liability. A shareholder who is not
*personally liable* (key point!) is not liable for more than
their investment in the LLC.
But LLCs do not (and cannot, and neither can "regular"
corporations, for that matter) protect you from unlimited
liability for what you *personally* do.
The corollary to this is that if you are a single-person
LLC, then by definition everything the LLC does is a
personal act by you, and since you can/will be personally
sued for your bad acts, in addition to the LLC being sued,
the LLC buys you nothing in the way of liability shielding.
Conversely, consider a two-person LLC (person A and person
B). While performing LLC business, Person A runs over a
pedestrian. Person A will be personally sued (since Person
A actually performed the bad act) and the LLC will be sued
(because Person A was on LLC business when he committed the
bad act). Person A faces unlimited liability because he is
personally liable. But Person B can only lose what he has
invested in the LLC, since he was not personally liable for
what happened.
--
Rich Carreiro rlc...@animato.arlington.ma.us