Corporation vs. sole proprietorship
Choosing which is the way to go, depending on the size and future of your company. October 2, 2001
Question
After describing our future business (custom made cabinetry and architectural woodwork), my accountant suggested a Limited Liability Corporation. I visited a SCORE Small Business Association counselor and he suggested a sole proprietorship. Do you have any suggestions or guidelines as to what kind of business a woodworking shop would better functions as?
Forum Responses
I have been incorporated and now run the shop as a sole proprietorship. It gives you more freedom to juggle money (small shops need to do that on occasion), and it is cheaper. It also does not require as much paperwork to be filed. Until you have several employees working on their own on jobs, I do not think being incorporated is the way to go.
A point to remember is that when you're a small shop, anything you do on the job can and will be viewed as a personal action on your part, thus eliminating the corporate veil. A good insurance policy will protect you more. Also remember the word "sole"--that does not include your spouse. You are the proprietor, not both of you. This will give some protection of joint property in the event of a catastrophe. Get the advice of many and sort out what will work best for you. It is also easier to borrow money if you need to as a proprietor.
Aside from the liability issue, incorporation for the small guy is hocus pocus and the above is right about transferring monies. On the upside, my accountant assures me that I am saving money… trouble is, I can't find it. I pay myself peanuts and get money out in lease agreements with my machinery. Now I am knee-deep is shells and my machinery has chosen not to exercise first option. Oh well, guess the fiber is good for the chute. Life was easier when I just robbed Peter to pay Paul. If you can beat taxes by incorporating, just do it.
I ran to the attorney for incorporation after one of my guys got into a little fender bender. He not only rear-ended one car while looking in the rear view mirror he nailed three and totaled my truck. I had so many people suing me that I was afraid that I was going to lose everything.
My insurance company, with their team of lawyers, kept everything under my limit. This lesson taught me that I don’t make enough to be low bid to get the job and then have to be responsible for everyone and the work that they do.
From contributor A:
If you have a business plan and that plan is to grow beyond you and a few employees, then a sub chapter -S corp is a good blend of corp and sole proprietorship. If you plan on staying small, then the sole proprietorship may be better.
From contributor F:
That is an interesting statement. Does California now recognize the Sub S or do you have another reason? I've not done business in the Golden State for several years, but the Sub S used to only satisfy federal considerations there.
From contributor A:
We are a subchapter S and have been for 11 years. I don't know when they allowed it but we talked about it for a few years, so I would say at least as far back as 87. We are also forming a LLC and a C to reallocate assets and shift tax burdens (reduce taxes).
From contributor F:
I preferred the 'C' for the same reasons. The LLC has become a real favorite of attorneys (for their clients) and CPAs as well. I look at it once a year but haven't felt the need lately and may never, but my situation is unique. I work now for the fun of it and working alone keeps it fun. Nevada has a nice tax situation.
We are a Sub S, as recommended by our lawyer. It treats income much like a sole prop, but gives limited liability protection. We carry a million dollar liability coverage and an additional million dollar umbrella, and still keep the assets of the corp low to avoid losing everything in a multi million dollar award. There are way too many lawyers in the world.
