Limited Liability Corporation (LLC) versus Sole Proprietorship
Which is Right for You?
Most basic auto repair shops or parts retailers fall into a couple of different categories; sole proprietorship’s, or limited liability corporations. We’ll give you a basic overview of both, including pros and cons of each, as well as a few tips on getting started with an LLC, or transferring your current company into one. Whatever you do, trying to “fly under the radar” and operate a business without paying taxes is probably the worst decision one could make, as the IRS can eventually come after both you and the business for tens or even hundreds of thousands in back taxes.
In a sole proprietorship, there is only one owner, and very little legal start-up complexity or fees. This type of business is popular in transport (as in, “Bob Jones Trucking,” or in sales (“Bob’s Performance) but probably most common in auto repair (“Bob’s Diesel Repair.”)
Sole proprietorships are popular for a few different and obvious reasons. The first is that they’re easier to start, and they put the owner directly in the driver’s seat. Second, taxes (which are often a difficult part of business) can also be easily handled, often with just simple itemized lists and 1040 forms. Despite the name, you can also hire employees if you have a sole proprietorship, which merely involves acquiring a Employee Identification Number (EIN) from the IRS.
As enticing as starting a sole proprietorship might be, there are also drawbacks. One of the main drawbacks (which can also be an advantage) is that there is no clear separating line between you and your business. You are the business. This means that in the case of a lawsuit or injury, the “business” is not clearly separated from you, and your assets like houses or vehicles could be at risk.
While it’s rare, sole proprietorships do give people the opportunity to go after everything you have. We’d be remiss not to mention that spouses will often go after a business in the case of a divorce, which is perhaps the biggest risk of a sole proprietorship. Bank loans and other financial transactions might also be limited, depending on savings, debt, and the capital of the business.
Limited Liability Corporations (LLCs)
It is said that one of the fastest growing types of business is an LLC, or limited liability corporation. This type of business is aptly named, as it does exactly what it sounds like it would do: it limits the liability of the owner of the company. Unlike a sole proprietorship, an LLC can have just one, or more than one owner, but in either case the company is kept separate from the individual.
This way, if there are debts or lawsuits, they are the company’s debts or lawsuits, not necessarily the owner’s. One important aspect of creating an LLC however, is to keep the company truly separate from the individual, and have the proper paperwork to back everything up. If the finances are scrambled, a judge can still declare an owner or owners personally liable.
An LLC is also very flexible when it comes to taxation, and can be taxed similarly to a sole proprietorship or a corporation. LLC’s can also have more than one owner, which makes this type of company very suited to partnerships with more than one investor.
At first, having an LLC may sound like an easy choice, as its ability to separate business from personal matters sounds like a win-win, but there are also some drawbacks. LLCs are subject to more government scrutiny, and are also often required to pay a yearly fee to operate.
Learning how to pay oneself from the LLC can also be similarly difficult to wrap one’s head around, but the answers are all out there. A one-time fee for a legal professional to set up an LLC can be the easiest way to transfer from a sole proprietorship to an LLC, as much of the guesswork is taken out.
Oftentimes in the diesel industry businesses start out as a sole proprietorship, and graduate into LLCs. The fact that mechanical work is dangerous, and tuning opens up the window to lawsuits means that an LLC isn’t a bad idea for any diesel business. While taxes and fees can vary from state to state, doing some research, talking to a tax, banking, or business professional, and seeing if an LLC is right for you might not be a bad move.