A sole proprietorship or a d/b/a is just another name for you. It is not a company and affords you no protection from liability. The sole proprietorship is the easiest way to get a business started but not the best way to operate over the long term. Let’s use a simple example of a car wash. Having employees and customers at your location exposes you to a number of risks. A customer could be injured and sue you, as could an employee. If you are a sole proprietor – you are personally liable for any claims that exceed your liability insurance. On the other hand, a business entity like a corporation or LLC is a completely different situation. Should a suit be filed due to an event at your business, it must be filed against the company, not the owners. This may not stop an attorney from suing the owners, but a judge would most likely remove them from the suit.
There are significant differences between a C-Corporation, an S-Corporation and an LLC. Both the C and S corporation have a federal filing requirement (the penalties for not filing are severe) where an LLC normally does not. The IRS does not recognize an LLC for federal tax purposes. An LLC is also referred to as a “disregarded entity”. Disregarded in this context means that all the income produced by an LLC is passed on to the owners and reported on their personal tax returns. The only federal requirements for an LLC are an information return and a K-1. A K-1 is similar to a 1099. A K-1 simply divides the income among the owners is whatever proportion applies to their ownership. The income or loss on the K-1 is reported on your tax return.
Selecting the right entity type involves a number of considerations and should be done in consultation with a competent business advisor.
For more information or a free consultation contact David Disraeli at 512-464-1110 or book a call here:
Copyright @ 2022 David Disraeli