In today’s business climate there is no need for a person to be a sole proprietor. Many ma and pa shops continue to operate as sole proprietors, however, they are exposing themselves to unlimited liability and risking potential loss of their personal assets. For purposes of illustration, a family owned pizza restaurant sends their delivery driver Johnny on a pizza delivery. On the way to delivering the pizza he hits a bicyclist crossing the street, the cyclist falls off his bike, hits the ground and has permanent brain damage. Employers are vicariously liable for the negligent conduct of their employees. Thus, in this hypothetical, the sole proprietor would be personally liable for the damages caused to the cyclist.
This exposure to unlimited liability can be reduced through the formation of a business entity. One simple form of business organization is an LLC. An LLC can be owned by a single member. In an LLC if the business is unable to pay its debts, the creditor cannot legally come after an LLC member's house, car, or other personal assets. Because only LLC assets are used to pay off business debts, LLC owners stand to lose only the money that they've invested in the LLC.
An LLC is a desirable option for a sole proprietor because it is fairly simple to file. An LLC in California, this can be done by filing an Articles of Organization with the Secretary of State. The cost of filing these articles of incorporation is $70. A Statement of Information will also need to be filed within 90 days of filing the Articles of Incorporation. It is also important to note that as all LLCs must file Form 568, Limited Liability Company Return of Income, pay the annual minimum franchise tax of $800, and LLC fee.
Further, unlike a corporation, an LLC is a pass through entity and is not required to file a separate tax return. This means that business income passes through the business to the LLC members, who report their share of profits on their individual income tax return. It is also important to note that although an LLC does not have to file a tax return it is required to file Form 1065, an informational return, with the IRS each year. This is a way for the IRS to ensure the members of the LLC are appropriately reporting their taxes.
As discussed above, the low cost of formation and very low formalities make an LLC a great option for sole proprietor to limit his exposure to risk. Please feel free to contact Aziz Legal by phone or email at (408) 203-4627 or firstname.lastname@example.org.
This article is merely informational and is not intended to be used as legal advice. Use of any information from this article is for general information only and does not represent personal legal or tax advice, either express or implied. Readers are encouraged to consult Aziz Legal, or another attorney, for any specific legal matters.