When Do I Go From Being a Sole Proprietor to Forming an LLC or Corporation?

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Have you been running your business as a sole proprietor? Is it time to form an LLC or a Corporation? If you meet any of these benchmarks, you should definitely consider making a switch.

You’re running a business!

In my humble opinion, anybody starting a business should start from the beginning with a Limited Liability Company (LLC) or a Corporation. The reason is, LLCs and Corporations give you legal protection that you just don’t get as a sole proprietor or as a partnership. They protect you from personal liability for business debts and they protect your personal assets as well. People tell me all the time, “Who cares if I get sued, I don’t have any assets anyway.” This is one school of thought, but I believe it is important to plan not just for where you are in the moment, but for where you want to be in the next 5 years.

In addition, if you form a Corporation (no matter how big or small), you might be able to take advantage of numerous tax credits and keep a little more money in your pocket.

You business generates revenue.

If your business generates revenue, chances are you have taxable income. In order to offset your tax liability you have to “write-off” certain expenses such as overhead, supplies, employee wages, etc. This is much easier to do if you have an LLC or a Corporation.

I have heard the question before, “My business operates at a loss, do I still need to form an LLC?” The answer to this question is yes. If you do not have a legal structure to your business, the IRS may deem your business (and its losses) a hobby audit your accounting practices. The last thing you want is the IRS auditing your financial information, so form an entity and keep your books pristine.

You interact with the public on a regular basis.

If you are in the retail or restaurant industry, you are interacting with the public on a regular basis and are a prime target for a lawsuit. All somebody has to do is walk into your business, trip, fall, and sue. Without the protection of an LLC or a Corporation, the injured patron will be suing you directly, whether or not you have insurance. If you have a business entity, the injured will sue the business and your assets, reputation, and credit should remain in tact no matter the outcome of the lawsuit.

As you can see, there are a number of great reasons for form an LLC or a Corporation and I believe every business should pick one or the other. Do your own research, but then find an attorney that you trust to walk you through the process. Let me know if you have questions!

 

About author:
Asha Wilkerson is the founder of The Wilkerson Law Office, P.C. Ms. Wilkerson provides skilled advice and counsel to for-profit, non-profit, and faith-based organizations in the areas of business and employment law. Her mission is to preserve the longevity of your business by ensuring that every aspect of your organization is legally sound and operating in compliance with state and federal law.

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