Should I form an LLC?

[Janitor Bob]

I have been operating my small part-time tax business as a sole prop for 20 years.....I think about forming an LLC every year...because it just seems like something I should do.  But every year when I go to actually do it and pay the state filing fee, I stop and wonder just how will will it help me?  Can anyone with some experience in this area advise...just what benefit would forming a single-member LLC have over a sole-prop?  Will it shield my personal assets in the case of a lawsuit?

[jasdlm]

It provides an additional layer of protection in terms of personal liability, but it is not an absolute. The corporate veil can be pierced, and if you are personally negligent, you will still be liable. It is a bit more of a hassle for the other side to pierce the veil and actually attach you individually, but it definitely can happen.   The best money spent is on good liability insurance. 

[Lion EA]

The LLC is a state entity, so do start by exploring your state website.  That said, some limited liability is afforded to LLCs in every state if the entity acts like an entity, not co-mingling monies, for instance.  If you have a friendly, local lawyer, do pick his/her brain also.  In CT, a tax liaison said at a meeting of tax professionals that if LLCs had been in existence before S-Corporations, that there would not have been a need for S-Corporations.  Don't know if a lawyer would go that far.

[NECPA in NEBRASKA]

I'm not an attorney, but I always heard that only insurance can protect your personal assets against a lawsuit. My attorney told me that even my corporation could not protect my assets against my mistake, only against me employees. I don't have employees anymore, but I hope that I have plenty of insurance. 

I'm not sure what am llc would do in your situation. 

[Lion EA]

I agree about good insurance.  An LLC does NOT replace your need for insurance -- in any state.

[RitaB]

My opinion is that all a SMLLC does in TN is add expenses to your life and some billable work for me.    It might POSSIBLY fake somebody out by making them THINK you'd be difficult to sue.  Kinda like that time back in the eighties when I tied my horse to a lawn chair while I ran in the house for a Mt. Dew and she stayed put.  My motto is do your job right, have the appropriate liability insurance, and don't worry about it.  

[Janitor Bob]

4 hours ago, RitaB said:

My opinion is that all a SMLLC does in TN is add expenses to your life and some billable work for me.    It might POSSIBLY fake somebody out by making them THINK you'd be difficult to sue.  Kinda like that time back in the eighties when I tied my horse to a lawn chair while I ran in the house for a Mt. Dew and she stayed put.  My motto is do your job right, have the appropriate liability insurance, and don't worry about it.  

This is what I have been doing and will continue to do...Instead of paying the fee for LLC, I'll use that money to further increase my liability insurance...or better yet, add a security breach/information loss ryder.

 

[Catherine]

They now sell "cyber" insurance and I bit the bullet and purchased that this year.  In addition to my E&O, I get far better protection for me and my assets for about the same fee as the annual state LLC fee.  And I would *still* need the insurance, and that insurance would cost the same.  

[Lion EA]

In CT, the LLC fee to SOS was only about $20 (maybe only $10 when I went into business) and that's it, so really a little extra protection for no big deal for a SMLLC that's just the same old Schedule C for tax purposes.  Then CT added a $250 business entity tax.  That makes all the difference in the world to a small business.  Buy more insurance coverage, as others have said.  To CT's credit, they now make the fee every other year instead of annually, but still....

[DANRVAN]

6 hours ago, RitaB said:

  Kinda like that time back in the eighties when I tied my horse to a lawn chair while I ran in the house for a Mt. Dew and she stayed put.  

That's funny. You should write a book!

[Catherine]

19 hours ago, Lion EA said:

Then CT added a $250 business entity tax.

MA annual LLC fee is $500 - plus $20 for the "privilege" of filing it online (which is mandated).  So really it's $520.  You can buy a LOT of insurance for $520 a year.

[Lion EA]

And, is CA's $800?!

[RitaB]

18 hours ago, Catherine said:

You can buy a LOT of insurance for $520 a year.

And insurance companies are in business to make money, so that tells you there are not many claims. 

[Roberts]

Friend is starting a small business and the attorney who is doing the state regulatory paperwork suggested he be an S-corp WITHIN an LLC. Never heard of such a thing and couldn't understand why you'd want it but that's what he's doing. In our state, an LLC is very VERY cheap to operate.

Seems the procedure when setting up the LLC is to elect to be taxed as a corporation. Then you file the Corporate election form to be taxed as an S-corp.

Of course the friend has already asked if taking $100 in "income" is enough to satisfy the S-corp pay requirement. He's the first person to come up with that.

[Lion EA]

If your client is organizing as an LLC, then after organizing the LLC he just files the S election to be taxed as an S-corporation.  You get to skip one form, because he's already an entity in his state.

I too don't understand why lawyers suggest an LLC taxed as an S-corporation and not just an S-corporation from the beginning.  Some states, such as CA, have high LLC fees; so sometimes starting as an S-corp can save money.

By the way, starting as an S-corp or going from a sole proprietor to an S-corp does require incorporating and then electing S status, two forms.

[Bart]

In Missouri, a corporation has an annual filing requirement with the Secretary of State and an annual fee.  An LLC has no such requirement.  It is easier to be an LLC taxed as an S corp than to be a real corporation.