From $200,000 in the bank to 0 – How your personal assets are at risk from an incorrect business structure.

The difference between a Sole Proprietorship, LLC, and Corporation.

You never think the worst case is possible – until it happens to you.

John, (name changed for the story) was a passionate entrepreneur. Like many of us, he worked years for someone else. But, eventually, he decided it was time to go out on his own. A big dive into the great unknown world of running a small business.

You know the feeling...

You have a vision and skill, and you want to help people by providing the best value.

The corporate job was no longer a good fit...

So, he started a small local home renovation business.

Because of his craftsmanship, John quickly began receiving referrals and new projects from friends and neighbors. Jobs began to pile up and business was good.

However, due to his excitement, John didn't pay much attention to the legal aspects of running a small business.

He didn't consult a bookkeeper, he didn't call his accountant, and he didn't get any small business tax strategy.

He didn't form an LLC

He didn’t know anything about getting taxed as a Sole Proprietorship

And he didn’t know anything about an S-corp. (Should I form an S-corp?)

He just knew he was making money and providing great value.

A simple "bookkeeper near me" Google search might have done the trick.... ;)

At the moment, none of that mattered. He had money in the bank and was free from the corporate race.

Years passed and Johns's small business grew. But, so did his debts. Unfortunately, he had a major project go bad, resulting in a lawsuit against his business.

Because he hadn't formed an LLC or any entity that offered personal protection, he found himself liable for the lawsuit's hefty settlement of.. $200,000. Yikes...

This financial blow hit hard. His personal savings, home, and other assets were at risk because of his business's improper formation.

What does this mean for your small business?

You might have heard stories similar to this.

Or you're thinking...this could be me...

So, how do we keep this from happening?

Let's quickly explore why a proper business formation is vital in shielding your personal assets from potential risks.

We'll also look at the risks of an improper formation. As well as the pros and cons of different small business structures to help you make the best decision.

Whether you're a start-up entrepreneur or business owner looking for advice on business structure, understanding these concepts can be the first step toward a more secure future.

The Risks of Improper Business Structure.

As you can see from Johns's story - how you structure your business matters. A lot.

Let's talk about it.

#1 Personal Liability: There's a "big deal" thing called personal liability. Put simply, this means your personal assets (home, car, boat, cash in the bank, etc.) are at risk if you carry business debt or if you run into legal trouble.

Pretty scary right? Losing personal assets is the last thing someone wants to think about when their business is suffering.

#2 Tax Problems: So, what if the debts don't rack up and legal trouble never comes your way?

Well, you're going to be taking a pretty hard hit on your personal tax return. Why? Because all of your money is wrapped into personal. Everything.

Yes, everything gets taxed on your personal income.

Short story - your tax liability is about to be heavy.

So, What are your options? And what are the pros and cons of each?

So, what's the best type of structure for you?

1. Sole Proprietorship:

The example above walks you through a Sole Proprietorship. It's easy, it's simple, and you have complete control (no red tape).

However, you're at risk of losing your personal assets. You also might have to pay more in taxes because all the business income is your income. This could leave your small business with a less the desirable tax payment at the end of the year.

2. Limited Liability Company (LLC):

If John had decided to go through the process of creating an LLC and keep business and personal records separate – his personal assets would have never been at risk.

Pros: What are the pros of an LLC?

With an LLC you're personal assets are always protected from business debt and lawsuits, plus you can choose how you want to be taxed.

Examples: Sole Proprietorship, Partnership, S-Corp, or C-Corp. We will save these for another day.

However, a bookkeeper or your accountant can help you determine the right type of tax strategy for your business.

Cons: What are the cons of an LLC?

Keep in mind - if you neglect to separate your personal and business expenses you could lose your ability to classify as an LLC.

It could be difficult for an LLC to obtain investors. This is mostly due to less reporting, no mandatory meetings, and other structural elements found within a Corporation.

Another con would be that the owners of the LLC must report profits as income on their personal tax return. This is known as pass-through taxation.

Want to learn more and see if an LLC is right for you? You can book a call with our bookkeeping team right here.

3. Corporation:

Our last option is a Corporation. Just like an LLC, a corporation will protect your personal assets.

Pros: What are the pros of a Corporation?

Additionally, it is a great formation if you're looking to raise money through investors, and offers flexibility for owner changes without negatively affecting the business..

Cons: What are the cons of a Corporation?

With some of the flexibility and opportunity for investors, comes more structure, accountability, and regulations.

Aka. more rules and more paperwork.

Some corporations also get hit a little heavier on the tax side. You pay taxes on the company and again for the shareholders.

So, what’s the right option for you? Overall our goal is to make sure you're company formation supports the type of growth you envision for your company, protects your personal assets from debt and lawsuits, and ultimately benefits you by saving on taxes.

Whether you're looking for a local bookkeeper in Savannah, GA or a small business  bookkeeper who can help you remotely, our team is here to help.

We've helped numerous businesses get set up with the right formation, keep accurate records, and save money on their taxes.

Want to learn more? Visit our pricing page to see if you might be a good fit. Or, feel free to schedule a call with one of our experts at no cost to you.