Sole proprietors, there are a lot of you out there. In September 2005 the U.S. Small Business Administration (SBA) released a report on sole proprietorship activity from 1985 to 2000. Here are some amazing statistics:
- About 73% of all U.S. businesses in 1997 were sole proprietors,
- Over 50% also earned a wage or salary as an employee elsewhere in 1999,
- Average gross receipts for sole proprietors in 1997 were $58,000,
- In the three-year span between 1997 and 1999, sole proprietorships grew 23%, from 15,122,882 to 18,596,656, and
- 50% of all U.S. businesses are home-based.
That half of all business is home-based shouldn’t be too big a surprise, and expect that number to rise with gasoline prices.
So what does all of this have to do with LLCs (limited liability companies), corporations and DBAs (doing business as)? Consider state laws, image and liability.
For the benefit of this column the assumption is that your company uses a name other than your legal name, whether it is a business card, brochure, flyers, website or any other means of advertising your products or services.
State & Banking Laws
Almost every state requires that you submit a Fictitious Name (DBA) Registration. This is also commonly referred to as DBA. If you do this on your own, the following procedures are required:
- Secure and fill in the registration form for your company’s state and/or county of residence,
- In some jurisdictions, fill out and submit a form to a local newspaper for a public, printed announcement of your company name, and
- Don’t forget separate fees, postage and travel to get all of this done.
Of course, the more convenient option would be to simply fulfill this process in one transaction with MyCorporation.com.
On the banking side, if you accept checks and credit card payments under the company name, most banks will not allow you to deposit those funds into a personal checking account. So you will have to open a separate account in the name of your company. In that case you will need to show your Fictitious Name Registration certificate to the bank.
Upgrading Image is a Double-Edged Sword
Let’s face it. Many customers are more impressed by an “Inc.” or “LLC” at the end of a company’s name. However, I strongly urge reviewing the pros and cons of each form of legal business structure before making such a move. Briefly, some of the pluses and minuses include:
- C Corporation – you face double taxation on company’s net profits and the dividends issued to you; usually you must file annual reports with the state; charitable donations to qualified non-profits are deductible on income before taxes; you add an additional account for FICA taxes (half is paid through company accounts, before income taxes, and half is deducted from your wage/salary compensation); with few exceptions, personal liability is eliminated.
- S Corporation – you still face double taxation, but have a greater flexibility of the amount of personal income will be diverted to dividend distribution, which is not subject to Social Security and Medicare taxes; you still have to submit annual reports to the state; charitable donations can still be deducted from income before income taxes; like the C corporation, the company files separate tax returns from your personal income; with exceptions, personal liability is eliminated.
- Single-Member LLC – there is much less paperwork than is required for corporations; like a proprietorship, you still have to pay self-employment taxes on net income (all Social Security and all Medicare taxes); with exceptions, you do eliminate personal liability.
Keep in mind that there are many other factors to consider beyond those noted above. Please review MyCorporation.com’s FAQ’s for C corporations, S corporations and LLCs for more details.
Liabilities
Proprietorships are the most vulnerable to personal liability falling on the owner. Furthermore, if you operate your business out of the home and accept customer visits to that home office, then potential liability is expanded when the business customer comes on the residential premises. This vulnerability to personal liability can be dramatically reduced by changing the legal business structure to a single-member LLC or corporation.
Conclusion
No one path to legal business structure is the right one for every sole proprietor. Some may be better off remaining sole proprietors, especially if the products or services offered would not be considered "high-risk." However, I strongly urge that any full-time sole proprietor consider, at the very minimum, single-member LLC status. If nothing else, you eliminate almost any possibility of personal liability exposure. And hey, having LLC at the end of the company name doesn’t hurt the company image.
S corporation status would be an excellent alternative for sole proprietors making a significant income. You can cut down on the exposure to Social Security and Medicare expense with a diversion of part of the income to dividend distribution.
Finally, the sole proprietor seeking investors may want to consider the C corporation. In particular, venture capitalists prefer this business structure. There is more room to negotiate types and numbers of shares of stock, dividend distribution, buyout options, IPOs and more.
In the end, if you still have questions, contact MyCorporation.com. The company founders and their staff are very qualified and capable of addressing any questions you may have about the advantages and disadvantages of each type of business structure as they relate to you goals and objectives.
Sources:
MyCorporation.com at http://www.mycorporation.com/
U.S. Small Business Administration at http://www.sba.gov/advo/research/rs263tot.pdf and http://www.sba.gov/advo/research/rs235tot.pdf
|
