# When and why did you make the jump from Sole Prop. to LLC?



## EricBrancard (Jun 8, 2012)

D&FServices said:


> Funny this thread came up as I just had this talk with one of the largest business accountants around here. She stays ahead In the game. Constantly going to seminars, this that and the other. The way she put it to me was now days an LLC means nothing in court. The reason she gave I know to be true because I know someone who is a business owner involved in a MAJOR lawsuit even though his business is an LLC his personal property could still be at risk and his attorneys have made that clear to him.
> 
> If you are sued for NEGLIGENCE an llc DOES not matter. Your personal assets may still be at risk. 20 years ago it was pretty well standard practice that the law was interpreted to separate business from personal but as time has passed the interpretation has changed and in the case of NEGLIGENCE don't be fooled into thinking you can only lose business assets.


Someone can sue you for whatever reason they want. They would have to prove negligence.


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## D&FServices (Feb 2, 2015)

I completely understand they have to prove negligence BUT if they can prove negligence by you then the LLC does not protect your personal assets from a lawsuit. If you have several employees and one of them is negligent and they cannot put negligence on YOU then the LLC comes into play. 
I'll give you an example: If I am negligent on a job and someone gets seriously hurt or killed because of my actions even though I am set up as an llc my personal assets ARE at risk because I cannot make the case that myself and my company are not one and the same.


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## EricBrancard (Jun 8, 2012)

D&FServices said:


> I completely understand they have to prove negligence BUT if they can prove negligence by you then the LLC does not protect your personal assets from a lawsuit. If you have several employees and one of them is negligent and they cannot put negligence on YOU then the LLC comes into play.
> I'll give you an example: If I am negligent on a job and someone gets seriously hurt or killed because of my actions even though I am set up as an llc my personal assets ARE at risk because I cannot make the case that myself and my company are not one and the same.


Absolutely. You can't setup an LLC or a Corp to protect yourself from negligent or fraudulent behavior.


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## herbdavey (Feb 27, 2009)

In CA you can setup an LLC for 70 bucks. No attorney needed. Getting a FEIN takes 5 minutes on the web. The 100 60/40 answer was a great one.


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## Calidecks (Nov 19, 2011)

California requirements, it certainly will cost much more then 70 bucks. 

Below are some primary requirements for and components of LLC licenses.

$100,000 LLC Employee/Worker Bond
A $100,000 surety bond (in addition to the $12,500 contractor bond) is required for the issuance, reissuance, reinstatement, reactivation, and renewal of an LLC license for the benefit of any employee or worker damaged by the LLC’s failure to pay wages, interest on wages, or fringe benefits, as well as other contributions (not required for inactive LLC licenses). (Business and Professions [B&P] Code section 7071.6.5)

$1 Million Liability Insurance Minimum
Liability insurance with the cumulative limit of at least $1 million for licensees with five or fewer persons listed as members of the personnel of record is required. Also, an additional $100,000 is required for each additional member of the personnel of record, not required to exceed $5 million total. (B&P Code section 7071.19)

Effective January 1, 2014, B&P Code section 7071.19 (c) requires that LLC liability insurance policies be written by insurers that are "duly licensed by this state or an eligible surplus line insurer." According to the legal office of the California Department of Insurance (CDI), the only insurers that are duly licensed by the State of California are admitted insurers that are licensed by CDI, searchable on their website under*Insurance Company Profiles. Eligible surplus line insurers include those listed on CDI’s List of Approved Surplus Line Insurers (LASLI).

Personnel of Record
Every person who is an officer, member, responsible manager, or director must be listed as personnel of record on LLC applications. (B&P Code section 7065)

Qualifying Individual
LLC licenses must be qualified by a responsible managing employee (RME), responsible managing officer (RMO), responsible managing manager, or responsible managing member. (B&P Code section 7065)

$1 Million Personal Liability during Secretary of State Suspension
If an LLC license is suspended for failing to be registered and in good standing with the Secretary of State, each person within the LLC may be held personally liable up to $1 million each during the time the LLC is suspended. (B&P Code section 7076.2)

Liability Insurance Information on Contracts
Specific general liability insurance information is required to be included on the LLC’s home improvement and service and repair contracts. (B&P Code sections 7159 and 7159.10)

License Number Reissuance
Sole owner and corporate license numbers may be reissued to LLCs under certain circumstances. (B&P Code section 7075.1)

Joint Venture Licenses
An LLC may be listed as an entity on a joint venture license. (B&P Code section 7029)

Partnership Licenses
LLCs may serve as a general partner on a partnership license provided the LLC meets the above requirements relating to the additional surety bond and liability insurance. An LLC serving as a limited partner on a partnership license is not required to meet the additional surety bond and liability insurance requirements.

Business Name Styles
According to the Secretary of State’s office, LLC business names have specific requirements and restrictions. Interested parties should contact the*Secretary of State’s office*directly for full information about LLC business name issues. Briefly, LLC business names must comply with the following.

The name of an LLC*must*end with the phrase "Limited Liability Company” or the abbreviation "LLC" or "L.L.C." The words “Limited” and “Company” may be abbreviated to “Ltd.” and “Co.,” respectively. (Corporations Code section 17052 (a))The name of an LLC may*not*include the words "bank," "trust," "trustee," "incorporated," "inc.," "corporation," or "corp." (Corporations Code section 17052(d))The name of an LLC may*not*include the words "insurer" or "insurance company" or any words suggesting that it is in the business of issuing policies of insurance and assuming insurance risks. (Corporations Code section 17052(d))If the name of a foreign (out-of-state or out-of-country) LLC does not conform to the requirements of Corporations Code section 17052, the foreign LLC must agree to transact intrastate business under an assumed name that does meet the requirements of Corporations Code section 17052 to register with the Secretary of State. (Corporations Code section 17452)

Other Requirements
Most other requirements and provisions that apply to corporate licenses also will apply to LLC licenses.


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## skillman (Sep 23, 2011)

S-corp from the start of company. Comes down to different tax advantages and legal ones as well .


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## sailfish27 (Jan 25, 2014)

A corporation's purpose is to shield the individual or shareholder against the actions of the corporation. If we are all shareholders of corporation x and one officer does something dumb, the rest of us are not going to be held personally responsible. The greatest benefit of a corp/llc is to protect it's owners from the actions of the corporation or it's partners and that includes financial decisions. 

If my llc. took out a loan on a new truck or it signed a lease etc. I would not be held personally responsible for the note. If the vehicle went into default it wouldn't effect my credit the slightest.

Another advantage of an llc/corp. is not having to pay fica. For those of you who wish to re-invest in your business by simply leaving the money in the business instead of paying yourself the company pays no employment taxes (provided there are more than one officer).


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## pinwheel (Dec 7, 2009)

EthanB said:


> I'm still a sole prop because I have no intent to grow large enough that I could plausibly argue that the business and I aren't one and the same. I've asked several litigation attorneys and they all said that there really wasn't any legal protection, in my case. My CPA tells me how to save as much tax money as possible. When I cross the threshold where the tax benefits of LLC or Inc. are better, he'll move me on over.
> 
> Why pay for professional advice if I'm not going to listen to it?



That sounds like the exact conversation I had with my accountant a few years ago. Thats why we're still sole Prop.


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## Spencer (Jul 6, 2005)

IMO, if you plan on making any money you can't afford not to go LLC filing as S-Corp.

Most costly thing I did my first year was not become an LLC right off the bat. It has tremendous tax advantages.

Lets just say you want to pay yourself $60,000/yr. As a sole proprietor you are going to pay taxes on the full amount which would be somewhere in the ball park of 35% here in Indiana. 

So as a sole prop you pay $21,000 in state and federal taxes at the end of the year.

As an LLC you can elect to take salary that falls in line with industry standards for the work done. So again, you want a salary of $60,000 per year. With an LLC you can break that in half and take the other $30k in form of distributions. You are not subject to FICA tax on the distributions so you are saving 15.3% on that money. So your same tax burden on the $60k at the end of the year is $16,410 under the LLC.

$21,000 - $16,410 = $4,590 savings at the end of the year just for being an LLC filing as S-Corp.

And you're quibbling over the couple hundred bucks it will take to form it....

Also, any money that you want to keep in your business as operating capital is taxed at the full rate as well being a sole proprietor.


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## Spencer (Jul 6, 2005)

I can see where you could argue against the LLC from a legal protection standpoint. I don't know anything about that.

From a tax standpoint, the only way I can see it not mattering if you stayed a sole prop is if:

1) you paid yourself a very low salary that would not allow you to legitimately split it and take distributions, and 

2) you spend all the money at the end of they year on tools and equipment that could be expensed 100% under section 179, thus reducing your tax burden to zero on that money. 

But it looks like section 179 may be going bye bye so it might make sense to look into the LLC.


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## TNTRenovate (Aug 19, 2010)

D&FServices said:


> Funny this thread came up as I just had this talk with one of the largest business accountants around here. She stays ahead In the game. Constantly going to seminars, this that and the other. The way she put it to me was now days an LLC means nothing in court. The reason she gave I know to be true because I know someone who is a business owner involved in a MAJOR lawsuit even though his business is an LLC his personal property could still be at risk and his attorneys have made that clear to him.
> 
> If you are sued for NEGLIGENCE an llc DOES not matter. Your personal assets may still be at risk. 20 years ago it was pretty well standard practice that the law was interpreted to separate business from personal but as time has passed the interpretation has changed and in the case of NEGLIGENCE don't be fooled into thinking you can only lose business assets.


If you maintain the veil, it's much harder to pierce. Problem is most don't maintain it. That's the problem. It also depends on the state you are in. 

Let's also consider this is the lion
Opinion of one accountant, not a lawyer, an accountant.


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## Spencer (Jul 6, 2005)

TNTSERVICES said:


> If you maintain the veil, it's much harder to pierce. Problem is most don't maintain it. That's the problem. It also depends on the state you are in.


Yep, if there is shadow banking happening they are going to sniff it out. Best to always be legit.


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## overanalyze (Dec 28, 2010)

TNTSERVICES said:


> If you maintain the veil, it's much harder to pierce. Problem is most don't maintain it. That's the problem. It also depends on the state you are in.
> 
> Let's also consider this is the lion
> Opinion of one accountant, not a lawyer, an accountant.


Do you mean separate accounts from personal & buisness?


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## TNTRenovate (Aug 19, 2010)

overanalyze said:


> Do you mean separate accounts from personal & buisness?


Separate everything. No purchase from the business account for anything personal. Minutes for meetings. Everything that separates you from your company.


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## EthanB (Sep 28, 2011)

Spencer, my understanding of an LLC is completely different than that. Any single owner LLC is a pass through entity so the actual taxation is no different than a sole prop unless you elected the corporate tax classification. You're even taxed on retained earnings. If you do elect to file as a corporation, which it sounds like you did, then you can take dividends but you're subject to double taxation.

The thing about your example is that the IRS could take serious issue with the numbers you are providing. If you are the only officer(or employee for that matter) then they're not likely to agree that $30k is a reasonable salary for running a business, sales, and all the work completed. They have tables for everything so they know exactly what a lead for an operation with your gross sales makes. Using the $30k as income in a two person household drops you into a REALLY low income bracket so the double taxation is very minimal. If you were drawing a more accurate salary then I don't think there would be a benefit. Frankly, I don't think you can argue for leaving much, if any, of that $60k as dividends.

I'm sure you talked to a CPA but the above is what I've heard from four different CPA's over the years.


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## overanalyze (Dec 28, 2010)

TNTSERVICES said:


> Separate everything. No purchase from the business account for anything personal. Minutes for meetings. Everything that separates you from your company.


We have separate accounts for the business. Always have. If we make a personal purchase it is tagged and put on an invoice. We are horrible at updating the minutes book!!


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## TNTRenovate (Aug 19, 2010)

EthanB said:


> Spencer, my understanding of an LLC is completely different than that. Any single owner LLC is a pass through entity so the actual taxation is no different than a sole prop unless you elected the corporate tax classification. You're even taxed on retained earnings. If you do elect to file as a corporation, which it sounds like you did, then you can take dividends but you're subject to double taxation.
> 
> The thing about your example is that the IRS could take serious issue with the numbers you are providing. If you are the only officer(or employee for that matter) then they're not likely to agree that $30k is a reasonable salary for running a business, sales, and all the work completed. They have tables for everything so they know exactly what a lead for an operation with your gross sales makes. Using the $30k as income in a two person household drops you into a REALLY low income bracket so the double taxation is very minimal. If you were drawing a more accurate salary then I don't think there would be a benefit. Frankly, I don't think you can argue for leaving much, if any, of that $60k as dividends.
> 
> I'm sure you talked to a CPA but the above is what I've heard from four different CPA's over the years.


It's pretty much how I roll. Although I am an s-corp not llc. My wife us also an officer.


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## EthanB (Sep 28, 2011)

TNTSERVICES said:


> It's pretty much how I roll. Although I am an s-corp not llc. My wife us also an officer.


Which? Low wages and high distributions? Have you ever been audited?

I'm not at all positive that I am right, it's just what I've been consistently advised over 15 years. Maybe Poppa can take home some more dough!:thumbup:


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## Spencer (Jul 6, 2005)

EthanB said:


> Spencer, my understanding of an LLC is completely different than that. Any single owner LLC is a pass through entity so the actual taxation is no different than a sole prop unless you elected the corporate tax classification. You're even taxed on retained earnings. If you do elect to file as a corporation, which it sounds like you did, then you can take dividends but you're subject to double taxation.
> 
> The thing about your example is that the IRS could take serious issue with the numbers you are providing. If you are the only officer(or employee for that matter) then they're not likely to agree that $30k is a reasonable salary for running a business, sales, and all the work completed. They have tables for everything so they know exactly what a lead for an operation with your gross sales makes. Using the $30k as income in a two person household drops you into a REALLY low income bracket so the double taxation is very minimal. If you were drawing a more accurate salary then I don't think there would be a benefit. Frankly, I don't think you can argue for leaving much, if any, of that $60k as dividends.
> 
> I'm sure you talked to a CPA but the above is what I've heard from four different CPA's over the years.



In regards to the issue about how the IRS of use the salary my CPA has advised me that there are two important areas to look at. One is what you have collected as a salary in the past for the same work.

So for example if last year I was a sole proprietor and paid myself 75,000 and then decided that this year I wanted to take a salary of 30,000 and then pay myself a distribution of 45,000. They would take an issue with that because you have shown them that your salary is not realistic.

I was advised that if you can go back and point to what you have paid yourself over the last five years and you are in line with that you're on solid ground should an issue arise.

The other important thing to look at is the ratio of salary to distribution. It should be somewhere close to 50-50. My understanding is that your distribution can go quite a bit higher but if you're taking a much larger chunk of distribution you need to make sure that you're taking a hefty salary as well.

I would be curious to talk to some other CPAs on this matter. At my last tax appointment my CPA made it sound like the IRS looks at your salary and distribution combined to see if that is in line with industry standards. Not the salary alone.

You are right about the LLC pass through. I am not really familiar with that. I just know I elected to file as an S Corp because it had the best tax advantage for me by far.

I believe you are thinking of a C Corp. when you're referring to the double taxation. S corpse are not subject to that.


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## EthanB (Sep 28, 2011)

Spencer said:


> I believe you are thinking of a C Corp. when you're referring to the double taxation. S corpse are not subject to that.


You're right. That's the only corp structure I'm familiar with. I took a minute to do some digging(while I wait for my diesel to warm up) and found a pretty handy link for criteria. It jived with a couple other articles I read.http://www.lawmg.net/articles/determining-%E2%80%9Creasonable-compensation%E2%80%9D-s-corporation

It's hard to know exactly what's going to happen in an audit, I've been through two full audits with other companies, so I tend to play it overly safe. What your CPA said as far as past earnings falls in line with the article although that salary does seem pretty low. But, like I said, why pay for professional advice if you aren't going to listen to it?


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