Simply Beautiful Business Entity

Are you operating your home-based business without liability protection? You are if you are operating as a sole proprietor. Do you think that your personal assets are not at risk because you don’t have any employees and/or you work from home? What happens if a delivery man falls on the doorstep of your business and decides to sue for a disabling injury – and your business doorstep is also your home?

It just makes good sense to set up a liability limiting entity to operate your business. These entities will form a protective legal wall around your personal assets. Since most business-related liabilities cannot penetrate that wall, your personal assets are then safe from the delivery man’s lawsuit.

Once you decide you need a liability limiting entity, the next step is to choose which kind. There are 3 to choose from – LLCs, S Corporations and C Corporations. The best entity for you will be the entity that delivers the best tax results for your circumstances.

One very important thing to note is that no liability limiting entity can protect your personal assets from liabilities related to professional errors and omissions or tortuous acts such as reckless operation of your car resulting in injuries or property damage to others. This protection is available by conducting your business with due diligence and buying adequate insurance coverage.

The second layer of protection then is the liability limiting entity to protect you from things which are totally beyond your control.

Today our discussion is on the single-member LLCs. The laws of all but a few states now explicitly allow single-member or one-owner limited liability companies (SMLLCs). The owners are referred to as members and gain two big advantages: liability protection and maximum federal-tax simplicity.

The liability protection is corporate-style. This means only assets owned by the SMLLC (if any) are exposed to liabilities related to its business activity. The owner’s personal assets are generally off limits.

There are also favorable federal income tax results as an SMLLC. IRS regulations say that an SMLLC is ignored for federal income tax purposes. That means if you started as a sole proprietor and then become an SMLLC, nothing will change for federal tax purposes. So you would still continue to report your business income and expenses on Schedule C, report self-employment tax on Schedule SE, and making quarterly estimated tax payments just like always.

If you form an SMLLC for an existing rental real estate operation, this also will continue to be reported the same – income and expenses on Schedule E and quarterly estimated tax payments will be made just like always.

The big advantage of this entity is simplicity. No separate tax return is required to be filed and there is no worry about causing unexpected tax problems when transactions are conducted between the owner and the business (such as taking money out of the checking account or transferring ownership of an asset). Simple can be beautiful!