Sole Proprietorship vs. LLC? Starting a smal retail space.

February 10, 2004 8:18 AM

Business Owners: What have you seen as the various benefits/pros/cons of a Sole Proprietorship vs. an LLC. When considering starting a small personal retail space, which would you advise to use?
posted by BrodieShadeTree to work & money (17 comments total)

While I don't (yet) have a business of my own, I spent the better part of last Friday investigating the various options available, and found Inc.com's Guide to Starting A Business invaluable. Specifically, check out Which Legal Form is Best for Your Business? and Sole Proprietorships Defined.
posted by Danelope at 8:28 AM on February 10, 2004

Is this another "how can I get advice without talking to/paying a professional?" type question? Because I'd recommend contacting an accountant to see which organization would be better from a tax perspective, then contacting a business attorney.

That Inc.com website is really neat, thanks for the link.
posted by eastlakestandard at 9:04 AM on February 10, 2004

This is good. I hadn't even thought of asking this yet (but I would have). Thanks, Danelope and BrodieShadeTree
posted by troutfishing at 9:12 AM on February 10, 2004

This is NOT an advice avoidance. I have already talked to a CPA (cha-ching) and a lawyer (cha-ching) as well as the SBA. (free!)
They all conflicted in their advice, hence the AskMefi post.
GREAT links! Danelope. Thanks loads.
posted by BrodieShadeTree at 9:36 AM on February 10, 2004

IANYAL. In general, a single or multi-member LLC will provide you with a good liability shield. A sole proprietorship will generally not provide with protection of your personal assest in the event of a laibility poroblem. In other words, although common, sole proprietorships are not a great idea.
posted by anathema at 9:54 AM on February 10, 2004

BST, check your hotmail account.
posted by anathema at 9:59 AM on February 10, 2004

Is this another "how can I get advice without talking to/paying a professional?" type question?

In reality, the vast majority of questions posted to Ask MetaFilter could be answered via the services of a paid professional. I'm sure a host of computer technicians, business consultants, lawyers, doctors, veterinarians, psychologists, et al would be happy to accept our money. The point, however, is that while Ask MeFi is no subsitute for concrete legal, medical, or financial counseling, it can certainly set people on the right path and prepare them adequately when dealing with the aforementioned paid professionals.

In other words, although common, sole proprietorships are not a great idea.

From what I gathered, this appears to be contingent on the type of business and the potential liabilities to which you would be exposed. As cited in the articles above, a delivery service (with the requisite employees, company vehicles, etc.) is far more likely to encounter instances of liability than a single-person Web design company.
posted by Danelope at 10:07 AM on February 10, 2004

From what I gathered, this appears to be contingent on the type of business and the potential liabilities to which you would be exposed. From what I gathered, this appears to be contingent on the type of business and the potential liabilities to which you would be exposed.

Well, since I deal with intellectual property issues every day, I have to disagree. Creating the entity WebDesign LLC can protect your personal assests from a trademark or copyright claim, whereas WebDesign sole proprietorship leaves you wide open. Not pretty.
posted by anathema at 10:16 AM on February 10, 2004

Anathema, can't check hotmail from work. will check pm. thx.
posted by BrodieShadeTree at 10:24 AM on February 10, 2004

Of course you still need to follow the rules of the game; don't co-mingle funds, statutory requirements, etc.
posted by anathema at 10:24 AM on February 10, 2004

BrodieShadeTree, you may also want to check with your state's Secretary of State. One of my friends picked up a free book from the MN SOS, and was able to incorporate his consulting business on his own (although he uses an accountant for tax purposes). Also, different states have different corporate forms, so that may affect your decision.

For example, if I remember correctly, when I took corporations in law school, we studied our state's partnership and corporate laws; the professor instructed us that the LLC was inferior to incorporation. Your SOS may have similar advice.
posted by subgenius at 10:57 AM on February 10, 2004

My opinion only, I don't have any particular expertise, just some experience. I Don't know about incorporating, but I have been a sole proprietership for about three years now, and it's convenient in that the entity is me and I am the entity. There are some confusing bits though, I have to pay myself a salary, which is taxable as personal income for me, all business income goes to the entity, not to me, etc. I keep two bank accounts and am constantly shifting money around in a transparent way, so I have records when/if I need them.

However - anathema is right - because I am the entity, I am also liable for just about anything personally. I had a brief dispute with a distribution company I work with in Alaska, and when I thought about consequences of something going sour, I started to reconsider my sole-proprietership status. Luckily things went well and all is well.

I think is the stakes are low and the liability is low, sole-proprietership is a convenient way to go. If you're risk-averse, or your business will be higher stakes than a glorified hobby, then consider incorporation.
posted by kokogiak at 11:08 AM on February 10, 2004

IANAL, but I used to own a small business. Sole Proprietor because I had so few assets to start with I didn't need protection. Business insurance provided some coverage in case somebody fell and sued. In Maine, large personal injury awards are uncommon. Sole proprietor is easy, and you can always do an LLC later. Many vendors wanted me to personally sign for credit, so protection from financial liability wasn't available.
posted by theora55 at 11:12 AM on February 10, 2004

With a Sole Proprietorship, you bear ALL liability for your actions. And I mean ALL. You manage to make someone's house collapse? Be prepared to give yours up.

With an LLC, the directors (and likely president) will bear the responsibility. Depending on where you are, your maximum liability may be the value of the company, or may be the maximum that the directors own (not just in the company, but also their own personal assets).

If you manage to put non-monied people in as directors of an LLC, you can really limit your liability. At the moment, apart from the value of the company, for example, my company is liable for about $2,000, as me and the business partner are both flat broke. My parents (and his), being the prime shareholders, don't bear the responsibility, although they provide the money (I'd need to double check that, though...).

Accounting is done differently for an LLC as compared to a Sole Proprietorship. It's pretty much necessary for an LLC, because the shareholders will want to see it, whereas you can get away with none in a Sole Proprietorship (but you are shooting yourself in the foot for doing so). Also, depending on where you are, registering for a company name will be different for an LLC than it is for a Sole Proprietorship. For me, as I wanted a Canada corporation, a name search against all Canadian businesses had to be done, resulting in me eventually picking the (lame) name I have now.

With a Sole Proprietorship, those sorts of extensive searches aren't usually done. This can be beneficial, since, unlike us, you won't need to spend 3 months doing searches. However, at the same time, if you do pick a non-unique name, be prepared to change it and/or be sued for using someone elses company name.

With an LLC, you have the benefit of being able to "troll" for shareholders when you're running on empty. People are very wary of investing in a Sole Proprietorship, since you could take the money and spend it all on booze...

Setting up an LLC can be expensive or cheap depending on where you are and what you want. For us, the cost was $450 CDN for the papers from the government, and $1,300 in lawyer fees. If I had to do it over again, I wouldn't have wasted the money on the lawyer.

IMHO, you are always best going with an LLC.
posted by shepd at 11:59 AM on February 10, 2004

Along the lines of what shepd was saying about liability and control of assets...

Watch out for where the assets count in other decisions you may be facing. For example, my parents have an LLC. The business assets are counted as "theirs" on things such as the FAFSA and college aid forms. We scrambled to pay for school every term while My Institution of Training considered my family able to put two kids through school without assistance. It worked out in the end for us, but may severely affect education plans in families with more kids.
posted by whatzit at 12:02 PM on February 10, 2004

In the US, a single-member LLC is a disregarded entity for federal and (most) state income tax purposes. Therefore, the LLC would provide the limited liability but you would still be taxed as a sole-proprietorship.

You could probably set-up the LLC yourself using information from your state's Sec of State office.
posted by probablysteve at 1:12 PM on February 10, 2004

If you really want to shield yourself from liability, a full C corporation is the way to go.
posted by kindall at 5:52 PM on February 16, 2004