Sole proprietor vs. LLC

[Brian Bechard]

Which approach is better for for a wedding/event biz? I know the basic differences between the two and it seems like either would suit me. What are your experiences when setting up your new business?

[Philip Howells]

Brian, firstly I think what is right in your jurisdiction and market place and in mine may not be the same so bear that in mind. These are also just opinions.

LLC to some buyers looks established, businesslike and accountable; less likely to fail to turn up, or to disappear with the deposits.

LLC to some suppliers looks risky, others see it like the buyers do.

Sole trader to some buyers looks amateur, hobbyist; to others a craftworker, specialist.

Sole trader to some suppliers looks low risk - because they aren't under pressure to extend credit,

You already know the legal implications - my decision in your place would be my reaction to the above and the extent to which I feel I can handle the costs in money and time becoming and remaining an LLC, accountancy, tax, registration etc.

[Chris Harding]

Hi Brian

It's always a good idea to talk to your accountant about tax benefits as well!!

Our's suggested a family partnership consisting of myself and my spouse. This was because in the beginning if the business makes a loss (for tax purposes) then over here your wife can claim a rebate on her income because she had to support you during the tax year as you were unable to extract an income from the business after expenses were paid. It wasn't much for us (I think around $1500) but something is better than nothing. We are also permitted to claim 30% of our annual home rental as a deduction as we operate from a home office.

It's definately worth having a tax advisor if you run a small business as they can save you plenty of money. I wouldn't worry about an LLC for us as we don't really have any creditors ... in any service business like weddings your "stock" expenditure is tiny!! Most of your expenses are capital purchases and if you get your terms and conditions right you have a cash flow that most businesses would die for!! They are not many business that get clients to pay a good portion of the package upfront sometimes a year before the wedding so technically you shouldn't ever need a line of credit!!

Chris

[Chip Thome]

Brian I think the key here is your insurance coverage and how complete and thorough it is, as well as from who. In the absolute worst case scenario, the LLC has liability up to the value of it's assets. After that, it's bankrupt. You running personally, same limitations, everything you own and after that you are bankrupt.

I can't say I have heard of horror stories in this business of liability cases costing millions, so odds are in your favor. Talk to your insurance agent for liability coverage as well as looking for Errors and Omissions coverage too.

As Chris suggested, talk to your tax adviser too. All income or loss from the LLC passes onto your return, but reporting and bookkeeping requirements may be more stringent for an LLC.

Here in Wisconsin you can set up your LLC online with the State for about $150, far cheaper than a lawyer here would charge.

I've never gone LLC for anything because to be honest, I hate doing government paperwork. The least amount I can get away with, the better.

[Jay West]

It seems to me that there won't be any tax advantages or disadvantges to operating as a single-person LLC. If Virginia's LLC statutes are like those here in Montana. Basically, the U.S. Internal Revenue Service treats LLCs as sole proprietorships or partnerships unless you elect to be taxed as a corporation. (If you incorporated, you would probably elect "Subchapter S" anyway and you would be right back where you would be taxed as a sole proprietor except for having additional paperwork and the annual franchise fee to the State.)

The main questions for me would be these:

(1) How often (if ever) will you be hiring people to work for you? The more often you do it, the more attractive an LLC can be.

(2) How much competition do you have in your region? Having the name LLC (or Professional LLC) in your business name can have image advantages as pointed out above.

(3) Do you receive project materials from others often enough to be concerned about liability for damage? If you frequently, say, make 8mm movie transfers or scan heirloom family photos, an LLC can provide some protection from personal liability if things go horribly wrong (say, you melt that reel of the 50 year-old wedding film.) By "personal liability" protections, I mean protecting your non-business assets such as your home & etc. from being exposed to liability for the damages.

(4) How good are you at keeping up with accounting and keeping your business finances separate from your personal and family expenses. For example, you'll need separate account books and bank accounts. If you run your business out of your home, the LLC probably should be paying rent for the space it uses. The idea being that, if you do not treat the LLC as a separate entity, then nobody else needs to, either.

(5) There can be insurance issues, too. For instance, if you run your business from home, homeowner and renter insurance policies probably exclude anything connected with an LLC. You would need separate insurance for the LLC. Plus, if you run your business as an LLC with yourself as the manager and employee, your state might have requirements for buying worker's comp and unemployment insurance. This varies widely by state and might or might not be an issue in Virginia.

[Christian Brown]

Great points from Jay.

[Brad Owens]

Brian,

My wife and I just went through this process in Charlottesville, VA. We talked with three different accountants and each one said LLC is a no brainer. The folks in Richmond (where you'll be sending your paperwork) are incredible at helping you get everything together. $100 and you're done. The only thing you'll have to look at is if your county requires you to get a business license, here they don't. Getting a Federal Tax ID was easy enough on the web, let me know if you need help with anything. I just did this a month ago so it is still fresh. Keep in mind that with state taxes, you'll have to register for Sales and Use in addition to pass through entity if there are ever goods changing hands (if you print an extra DVD for them or they buy some later down the road). That area gets fuzzy when you include all deliverables in your "package".

I can explain it in more detail if you would like. It was an involved process and took a few weeks but I wouldn't call any of it "hard". Just time consuming.

Best of luck in your new business. Any time you come near Richmond or Short Pump, send me a message. We'll grab a beer and talk video.

[Chris Davis]

Originally Posted by Chip Thome

In the absolute worst case scenario, the LLC has liability up to the value of it's assets. After that, it's bankrupt. You running personally, same limitations, everything you own and after that you are bankrupt.

Originally Posted by Jay West

If you frequently, say, make 8mm movie transfers or scan heirloom family photos, an LLC can provide some protection from personal liability if things go horribly wrong (say, you melt that reel of the 50 year-old wedding film.) By "personal liability" protections, I mean protecting your non-business assets such as your home & etc. from being exposed to liability for the damages.

That's an oft-quoted, but incorrect assessment of an LLC. For a lone gun an LLC offers no personal liability protection. You will always be held personally liable for your own actions, regardless of the legal structure of your business.

Now if you have employees or other agents acting on your behalf, then an LLC will protect you from personal liability for their actions. Without employees (or contractors) an LLC is virtually worthless from a tax or liability point of view.

[Jay West]

"That's an oft-quoted, but incorrect assessment of an LLC. For a lone gun an LLC offers no personal liability protection."

Well, sort of.

As a practical matter, for single person operations, I think Chris's point is well taken, But, as lawyers say, it is technically a little more complicated .

What I was discussing with the point that Chris quoted is protection from contract liabilities rather than tort liabilities. Turning your business into an LLC does absolutely nothing to shield you from your personal responsibility for "torts" but can make a difference for contract liability. Whether the difference is meaningful for a one-man-band is a separate question that I'll talk about in a moment.

The concept of "contract liability" should be self evident. You make a written contract to video a wedding and fail to show up or don't deliver a satisfactory DVD; that's contract liability. "Tort" is mostly what lawyers call things like "negligence liability" and what most of us would call "accidents." There are also things like copyright infringement which kind of fall between tort and contract.

Basically, no form of entity will protect you from your personal responsibility for causing an accident. Say, you run over a pedestrian or rear-end another driver as you hurry to a job? That's tort liability. You run your business out of your home and a customer falls on that icy sidewalk which you didn't get around to sanding? That's tort liability, too. If you did it, you are liable. If you operate as an LLC, both you and the LLC are liable.

While on this subject, as Chris points out, the rules can be different when it is an employee of yours who runs over the pedestrian, rear ends the other driver, or gets sloppy with the ice melt, etc. The business is liable for what the employees do while working for you. But, if you have operated the business as an LLC or corporation and you were not personally involved in causing whatever accident occurred, then you have no personal liability. If you operate as s "sole proprietor," you do have personal liability. All of your personal assets might be taken and sold to pay the judgment. (That is, all of your assets that your state law does not make exempt from judgment.) If you operate as an LLC, only the LLC's assets are exposed to liability for a judgment. (The tradeoff is that most judgment exemptions do not apply to LLCs.) That is one of the reasons my previous post said that an LLC looks more attractive when you have employees.

For those kinds of things, you don't form an LLC; you get homeowner, business and auto liability insurance. This is why it is important to read your insurance policies carefully. Your homeowner's insurance might exclude coverage of any business you operate from your home. If it does, you want get a "rider" or a separate insurance policy for the business. If you have an LLC, the insurance company may insist on an entirely separate additional insurance policy for the LLC.

Now, let's say you make your wedding video using the bride's favorite top-40 song downloaded from iTunes, and the mega-organizations select for the example to instill terror in the rest of us. Your insurance is not going to cover you for this. Will having an LLC protect you from liability? Maybe, sorta, kinda, but probably not enough to make it worth your while. You'll still wind up getting sued personally and will spend a lot of money on legal fees.

For contract liabilities, things can be different. If you screw-up a job, in many (but not all) states, that's purely a contract matter. The rules for assessing contract damages are usually a lot more limited than is the case with tort liabilities. And, at least in the states that I work in, most contract parties cannot be sued for negligent breach of contract and can't get insurance that protects against contract liabilities. Okay, lawyers and doctors can be sued for "malpractice", but they are in licensed professions which are subject to special rules that do not apply to videographers. If the rules in your state are different, then there might (or might not) be some protection in having your business operate as an LLC.

If you did get something very valuable and screwed-up the contract, and the contract was with your LLC, then only the LLC is liable for that screw-up.

Unless, of course, you failed to take care of the separate accounting and the other things you need to do to make sure that the LLC is treated as an entity separate from you.

Now, we turn to the practical question of how much difference this kind of liability protection means to a solo videographer, assuming that he or she goes to all the work of keeping the LLC separate?

Are you planning on seeking large amounts of corporate funding for making PBS documentaries or maybe working on large-dollar commercial contracts? (Maybe you will need to hire employees to work those projects.) Or, maybe you have couple of different lines of business and you want to keep a failure in one from taking down the other? Many accountants habitually think in those terms which is why a lot of them will reflexively say that forming an LLC is a "no-brainer." In those situations, it usually is a no-brainer.

But, how likely are those things for you, a "lone gun" wedding videographer? For you the benefits of using an LLC for liability protection are less clear and may well be non-existent. Ask yourself, how big are your fees, anyway? How often do you handle very valuable things where there could be very large liabilities if you screw-up the contract? In terms of liability protection, isn't it easier to just put some language in your contract about your liability for breach of contract being limited to the price quoted for the job?

Thus, there may be reasons for a one-man-band to turn the business into an LLC but, for most "lone-gunners" liability protection probably is not going to be a significant consideration. So, despite Chris' "misquoting me" ;), I think he's right as a practical matter.

[Chris Davis]

I hope everybody considering an LLC takes time to read that. Good explanation of the difference between "tort" and "contractual" liability - point well taken.

I'll probably be doing a bit of "copy-and-paste" from that post in the future... :)

[Brian Bechard]

Wow I'm always amazed at the quality of feedback I get on this forum. Thank you to everyone who took the time to respond to my query. I'm going the sole proprietor route to start out and as I grow and possibly expand my payroll maybe look at the LLC option. Thanks again guys.