Do Not Operate As A Sole Proprietorship Or Partnership

I see business owners over and over again who are operating out of a sole proprietorship or partnership form of organization. It is so easy to organize as an LLC, or, if you have good reason, as a corporation. Everything can be done online, even acquiring your Employer Identification Number (EIN). You can be protected by this organizational decision in half an hour, yet so many remain unaware and unprotected. Since small business is so risky and so frequently fails, it is foolhardy to risk not having the equity and security provided by a corporate shield or LLC protection. Why assume such additional risk when an organizational decision will protect you?

There is really no discussion here, it’s a simple, immediate “must do”. Organize under the protective shield provisions available under either LLC or corporate organizational status. As a partnership or sole proprietorship, you are personally liable for any debts of the business, including tax liabilities for unpaid payroll taxes, lawsuits, anything. If you have a home and if there is equity in it, the equity is available to your creditors for paying off the business debts. If operating as a partnership and your partner is your wife, you are begging to lose the equity in your home and to carry debt with you well into the future if the effort fails.

If you need additional reasons, tax workouts are far more difficult as a sole proprietorship as many winning strategies are not available to you. Additionally, other workout strategies for debt incurred to vendors, banks, etc. are also far more difficult if you are personally liable, as all your debts are now personally guaranteed as opposed to them remaining business debts, not personal liabilities.

There is little to discuss, simply go online and follow the directions, get your EIN number first and then register as an LLC. Choose to be taxed as a partnership and you have the best of all worlds–the tax benefits of a proprietorship or partnership and the protection of a corporate shield. It costs a few dollars and requires an additional tax filing, but it is well worth the protection offered. You can have either your lawyer or accountant do it for you if you feel uncomfortable and this may be worth the extra cost to you. Either way, do it now. Do not procrastinate another minute, it’s that important.

Yes, you will also have to change your business identity to announce your status as an LLC or corporate format, thus your stationary, invoices and website, business cards, etc. will all have to be reprinted and changed to reflect the entity choice. You will have to create a new checking account, and since you get a new tax ID number you get to start your credit history all over again. The insurances and leases must be changed, too. But, in the end, it’s all worth the effort and additional expense. Do it before another day of exposure causes you additional personal risk.