7

In previous questions there seems to be a general consensus to seek incorporation early and always. Are there any reasons not to? Are there additional burdens that hit LLC's, corporations, and the like that do not hit sole proprietorships?

When or why would one choose not to incorporate or form an LLC in the United States?

Improve this question
0

3 Answers 3

Reset to default
7

LLC disadvantages vs. sole proprietorship:

  1. Government fees to establish and maintain the LLC (usually $100-$500 first year and up to $100 subsequent years, depending on your state).

  2. Paperwork to to establish and maintain the LLC. However, in some states, this is nearly zero - just a few minutes of filling out government web forms.

That's it. Taxes are the same if you choose pass-through taxation. Keeping separate bank accounts is a good idea to maximize liability protection, but is not required.

Incorporation disadvantages vs. sole proprietorship:

Same as LLC (government fees and paperwork), except much more extensive. Additionally, accounting regulations and taxes could be worse, depending on the type of corporation you choose. These disadvantages were the motivation for the invention of LLCs.

Resource: Nolo LLC Basics

Improve this answer
3
  • 1
    For maintaining an LLC, my state (Maryland) requires a personal property return to be filed every year. This costs $300 to file each time.
    – David
    Commented Feb 5, 2014 at 17:51
  • 1
    Ouch. @David, I wonder what the rules are for incorporating in a different state. Wisconsin, where I live, charges $25/year. Or launch a campaign to fire your governor the next time the opportunity comes around. :-)
    – Edward Brey
    Commented Feb 5, 2014 at 18:06
  • +1. I looked into Delaware and other states when I first incorporated. In short, I would still need to do the personal property return in Maryland for however long I live here. If I recall correctly, there may also be a separate fee for running a "foreign" (different state or country) company in MD - possibly a penalty for incorporating somewhere with a lower state income tax. I'm considering relocating (and reincorporating in a new state) soon!
    – David
    Commented Feb 6, 2014 at 1:31
6

There are a few disadvantages to incorporating as an LLC as opposed to going forward as a sole proprietor.

  1. More paperwork. Basically, since you'll be an actual company, you'd need to file paperwork with the state. This may differ state to state (since you mentioned the United States).
  2. Taxes. Depending on the state, you may need to pay self-employment taxes as an LLC. This would be the same as being a sole proprietor.
  3. Separation Of Money. As an LLC, you'd be an actual company, so you'd need to absolutely make sure that your personal money and your company's money don't mix.

There are a few resources that I used to pull my answer from; feel free to look at them as well!

Resources:
RocketLawyer: Why start an LLC? Limited Liability Company Advantages and Disadvantages
LegalZoom: Comparing an LLC to a Sole Proprietorship and a Partnership

Improve this answer
1

The main advantage of forming an LLC vs. a sole proprietorship or partnership is the greatly diminished risk to your personal finances. By forming an LLC, you shift responsibility for your business debts and liabilities from yourself to the newly formed corporate entity (thus, "Limited Liability Company"). So, generally speaking, if someone successfully sues your business or your business goes into a substantial amount of debt, creditors can only touch the assets you've put into the business.

So, for example, you would set up a separate checking account for your LLC, and if your business ends up owing a bunch of money, anything in that account is fair game, but your personal checking account would be off-limits, as would be your home and personal vehicle.

The primary disadvantage of forming an LLC is that you'll have to do a fairly substantial amount of paperwork and pay some fees to start and maintain the LLC. In Florida, it's $125 minimum to file, plus $138.75 each year with your annual report.

Long story short, if you're doing contract or gig work and business is good, there will eventually come a time where it makes sense to form an LLC. Whether that time is now for you depends on whether the hassle, administrative work and fees are worth the reduced risk given the current size, profitability, and future growth potential of your business.

(DISCLAIMER: I am neither a lawyer, accountant, nor financial advisor, and this information should not be taken as advice in lieu of consulting with a certified financial planner and tax, legal, or other professionals.)

Resources: LLC Asset Protection In-depth Overview

Improve this answer

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service and acknowledge you have read our privacy policy.

Not the answer you're looking for? Browse other questions tagged or ask your own question.