LLC or Sole Proprietorship

[pjfan74]

When setting up your business, what did you go with and why? Taking this next step and looking for reasoning behind the two options...or did you go with something else?

 

[melstan775]

I'm a sole proprieter for my hairdressing business. I don't have a lot in the way of personal assets and my insurance policy is more then efficient, so I didn't feel the need to incorporate. However, if I owned my house, had a big car or money in the bank I would probably form an LLC. LLCs give you fictional identity protection so your personal assets can't be touched in the event of a lawsuit. You still pay taxes on your personal income rather then a company income with an LLC, however.

 

[Shannon_m]

Right now I have a Sole Proprietorship... I chose this because in our state, if you register your business as a SP and you own a home-based business and earn less than $26,400 a year you can earn an exemption from the state for your state licensing fees. This just seemed to fit my business better than a LLC... in time I may file as LLC, we shall see.

 

[melstan775]

Right now I have a Sole Proprietorship... I chose this because in our state, if you register your business as a SP and you own a home-based business and earn less than $26,400 a year you can earn an exemption from the state for your state licensing fees. This just seemed to fit my business better than a LLC... in time I may file as LLC, we shall see.

You don't even have to have a business license in NV if your first and last name is in your business name. So if you change your name to Shannon XXXX's Smelliscious Soaps, you're exempt. You only have to get the license if you're going to have a storefront where you collect tax. If you're selling online, no tax! Now, this is my understanding of how it works, but if you know more then I do, please let me know. I would hate to think that off all the things I got wrong, it had to be licensing laws. -.-

 

[Shannon_m]

Nope you're right... I'm just a DBA but my business name is my name. I knew about the online selling, and that's a helpful tool if that's all you plan on doing. The reason I got the license is so I can get a taxation ID for my events since I have signed up for quite a few this year. I haven't gotten the City license(s) yet (the event covers that) but I will soon. I'm being optimistic about my future income at these events. Actually, in all honesty I'm not lol... I'm hoping the advertising will be good, but I am not going to get my hopes up. I have no idea how many vendors will be there but I already know there is at least one more soaper due to come.

 

[pjfan74]

Thanks to everyone so far...another question...do I need to make my "business" a llc or sole prop.or something like that in order to get insurance coverage to cover me at farmers markets or craft shows?? I swear, I don't know what other states are like, but I find trying to navigate the small business info in Maryland to be a nightmare!

 

[pjfan74]

Also, anyone here using Veracity Insurance? If so, what are your thoughts?

 

[Badger]

I plan to set myself up as a DBA here in MA. I spent a fair amount of time researching various business options last week and almost had a panic when I saw that LLCs were $500 a year to register and keep the paperwork up to date. I then found out that I can do a DBA for $25-50 for four or five years depending on my county (of course I have not figured out the cost for my county yet, but I at least got the basic information to get started).

 

[cerelife]

A LLC doesn't necessarily protect your personal assets in the event of a lawsuit. I as the soapmaker can still be sued personally if my product harms someone and I'm found negligent. Or so says my lawyer and the info I've found online...

 

[christinak]

People will have a difficult time proving that it's YOUR product that "harms" them. Make sure your labeling is accurate and honest...if they're allergic to something but it's on your label...that's not your fault. There's not much in a bar of soap that will hurt anybody My mom works with lawyers and they all laughed when I told them I was nervous about somebody suing me. I went thru the same thing selling chicken eggs, wondering what would happen if someone sued me. Good-luck proving it was my egg that made you sick

 

[Shannon_m]

It's true that personal injury lawsuits against a business is hard to prove, especially when so many environmental factors could affect the "outcome" of whatever harmed the consumer. It's very hard to prove personal injuries in bath & body products unless they get your product tested and see you were negligent in some way (selling something that needed a preservative and grew mold, mislabeling your product/negligent ingredient listing etc)

 

[melstan775]

A LLC doesn't necessarily protect your personal assets in the event of a lawsuit. I as the soapmaker can still be sued personally if my product harms someone and I'm found negligent. Or so says my lawyer and the info I've found online...

This is true also. I think it has mostly to do with whether your negligence is known. The law is a fickle friend, and I was posting a generalization.

 

[melstan775]

Thanks to everyone so far...another question...do I need to make my "business" a llc or sole prop.or something like that in order to get insurance coverage to cover me at farmers markets or craft shows?? I swear, I don't know what other states are like, but I find trying to navigate the small business info in Maryland to be a nightmare!

If you go into business for yourself, you are a sole proprietor unless you specifically set up a fictional business entity company. Being the sole proprietor essentially means, "I am this business and I run it by myself." There is no separation between yourself and your personal assets as a sole proprietor, and you pay taxes on your working income and business income in one.

 

[pjfan74]

Thanks again everyone! Yet another question...when does making soap and selling to friends and family and doing a couple of shows and maybe a summertime farmers market move away from being a "hobby" that brings enjoyment and maybe a little extra cash to something that one would need to classify as a business? Is there a dollar amount in terms of income/ profit?

Also, still looking for guidance on an earlier question...in order to purchase insurance through RLI (which is where I am currently looking) can I just be a hobbiest with occasional income or do I need to go through the Sole Prop., LLC, or similar route?

Researching this is mind boggling to me and I consider myself to be of fair intelligence...so I am not sure where my hang up is here!

Thanks again everyone! I really do love the experience, information and support that we find here on this forum!

 

[new12soap]

You don't even have to have a business license in NV if your first and last name is in your business name. So if you change your name to Shannon XXXX's Smelliscious Soaps, you're exempt. You only have to get the license if you're going to have a storefront where you collect tax. If you're selling online, no tax! Now, this is my understanding of how it works, but if you know more then I do, please let me know. I would hate to think that off all the things I got wrong, it had to be licensing laws. -.-

I wanted to clarify this: If you are selling online to customers outside of your state you are not required to collect sales tax, but if you are selling to someone located within your same state, yes you ARE required to collect and pay sales tax, even in Nevada. I do not know how the business license requirements work for your area.

As for the "good luck proving it was MY product that caused your problem", while that may be true you still have to answer any complaint or respond to any legal action filed against you, and a lot of times that can mean hiring a lawyer. Even if in the end you are not found liable the process can cost thousands of dollars. In many cases your insurance company will handle any claims filed against you, so that is something to check with your insurance about and yet another good reason to have it!

pjfan, there is no minimum or maximum or hobby classification for sales. Technically, if you sold one bar of soap to someone then you owe sales tax on it and are supposed to report that income to the IRS. Now I am not saying that anyone is going to come knocking on your door or anything, but yes technically that is a business sale.

To get back to the OP's question, whether to be a sole proprieter, an LLC, or anything else is really an individual matter based on your location, your circumstances and your business. I would suggest going in person to your state's department of state (they usually handle corporations and companies), explain what you are trying to do and ask for some guidance. They can't give legal advice but they are usually very helpful. If you can't get there in person, visit the website and get some info, then call them.

 

[Shannon_m]

As for the "good luck proving it was MY product that caused your problem", while that may be true you still have to answer any complaint or respond to any legal action filed against you, and a lot of times that can mean hiring a lawyer. Even if in the end you are not found liable the process can cost thousands of dollars. In many cases your insurance company will handle any claims filed against you, so that is something to check with your insurance about and yet another good reason to have it!

Completely agree. I wouldn't discount the insurance in any way, you don't want to be caught off guard should the unlikely happen.

 

[Lindy]

Most cities require a business license for a home business which soapmaking qualifies as. The least expensive insurance I have found is through the Guild (www.soapguild.org). The reason insurance is so important and so expensive is these are personal care products which raises the risk/chance of being sued. If you were selling other crafts then the liability is reduced since it is not being used on the body.

 

[melstan775]

You raise an interesting question new12soap. In NV, to get a sales tax license I believe you first have to have a business license. But you're not required to have a business license in some circumstances. I will look into this further. There's nothing like a good bit of beaurocracy to make things difficult is there?

PJ i also want to add when reporting income, the IRS allows three years loss as you build business. They also set that if you're not making x dollars a year after three years that your business is a hobby nd you can't deduct your expenses from running a hobby. I believe x dollars is set to 5,000 but I'm not 100% sure in that one.

 

[lillybella]

$500.00 for an LLC? Really?

Can't I just claim my on-line business & use my SS# as my business tax id #?

 

[goatlady]

ouch, insurance $500 a year! I probably wont even sell that much in soap!