Inc. Verses LLC or Nothing 5

[kvillebasser]

I was wondering if anyone had any thoughts on the following:

If a single engineer is opening a consulting business, with long term plans of having only himself and maybe a draftsman or two as employees, should the business be incorporated, be a limited liability company, or neither?

Any opinions?

 

[RDK]

Incorporation creates a separate legal entity separate from that of the person owning the firm.

The liability of the corporation is limited to the assets of the company.

If you operate as a sole proprietor then the individual’s total assets are at risk for effects of the business.

I understand that the term ‘limited liability company’ is something different in the US but do not know any details.

I operate a one-man firm and am incorporated mostly for liability reasons. If I get sued for more than the value of the firm then all I loose is the firm. If I was a sole proprietor then I could lose my house and savings as well.

Before making the decision and starting the process talk to lawyers and accountants who specialize in this area.


Rick Kitson MBA P.Eng

Construction Project Management
From conception to completion

http://www.kitsonengineering.com

 

[jimbo]

Only an attorney can answer the question based on the area you are in.
A corporation may or may not shield you from personal liability and loss of assets.
A private company such as a proprietorship is much simpler to operate, and normally less costly.

Buy a dictionary, keep it nearby and USE it. Webster's New World Dictionary of American English is recommended, and Webster's Collegiate Dictionary.

 

[jmw]

The concept of a limited liability company was to protect the owner from personal liability and designed to encourage more entrepreneurs to start businesses.

Then along came the banks and the investors who will only lend money on the basis of a directors guarantee where the owner puts up his personal assets, including the house, car, wife, kids, mistress, any pets etc, to secure the loan.

All that effort to prepare a business plan to secure investment and you might as well not bother.

Funny old world, isn't it?


JMW

http://www.viscoanalyser.com

eng-tips, by professional engineers for professional engineers
Please see FAQ731-376 for tips on how to make the best use of Eng-Tips Fora.

 

[zdas04]

Jimbo has it exactly right. There are (sometimes non-trivial) costs associated with forming a corporation (either a "normal" corporation, an LLC, a Sub-Chapter S, etc.), and in some jurisdictions incorporating doesn't adequately sheild your personal assets. You need competent legal and financial advice in your location about your specific situation.

I looked at the options and often conflicting advice I got from lawyers and accountants and got my business lisence as a Sole Proprietor. Maybe I'm just a cowboy who'll spend his golden years eating out of trash cans, but the initial and ongoing costs of incorporating were higher than I percieved the benefits to be.

David Simpson, PE
MuleShoe Engineering

http://www.muleshoe-eng.com

Please see FAQ731-376 for tips on how to make the best use of Eng-Tips Fora.

 

[buzzp]

The cost of incorporation varies greatly from state to state. Nevada and Delaware are the cheapest with the fewest set of rules, this is why several large companies (most notably credit card companies) incorporate in these states. In Nevada, its less then $500, assuming you have an office set up there or are willing to set one up.

Check out the SBA's site and they have huge amounts of info on the differences in LLC and INC as well as other forms of legal business structures.

http://www.sba.gov

 

[jmw]

In the UK it is around £80 but the incorporation cost is minimal compared to the other costs of setting up a business.

There are different financial implications, eg tax between setting up a limited company and as a sole trader, partenship or whatever as well as a range of legal and business considerations.

Very valuable when starting out is to get good advice. I attended a Cambridge business unit course at the local tech college choosing business start up, customer service and bookeeping and accounting modules, though there are many other modules available.

Key is to put together a busines plan. This is your blueprint for success. In this you will consider what form your company should take and why and you wil look at a whole range of costs; e.g. Proffessional indemnity insurance, personal liability insurance etc.

The business failure rates anywhere are, or ought to be, frightening as hell and should make you want to get all the help you can. Take any opportunity to reduce the risks and put your new business into that small group that will survive beyond the first year. Learn by the mistakes of others, not your your own.

JMW

http://www.viscoanalyser.com

eng-tips, by professional engineers for professional engineers
Please see FAQ731-376 for tips on how to make the best use of Eng-Tips Fora.

 

[Fizzhead]

Kvillebasser:

Having started my own company I have pondered the same question you pose. First question is what state do you want to practice in? Not all states offer the LLC form of incorporation. Next is the question of what forms that state will allow, or recommends for engineering firms. Try the web site for your states technical professions board and/or the secretary of state. I found a lot of good information on both. The key is to be certain that you shield your personal assets from professional liabilities. jmw makes a good point about the banks, but if the company has nothing, what can you expect the bank to do? This is a knotty question and one you might have to deal with if you want to start up on borrowed capital. Take it from me, it's much easier to do it from your savings just for the reasons jmw mentions!

 

[kvillebasser]

I've been saving my money for a long time in order for me to open this business. I have purchased my equipment such as workstations (furniture), plotter, software, etc as my paychecks would allow me to. I had set a goal at the end of last year to get going on this by July 1st. I prepared a business plan and presented to my local bank. I felt as though I would need a small loan to finish up buying what I hadnt already bought and to give me just a little more finacial cushion than I had calculated that I need.

The bank and I agreed on a 10k loan, unsecured. I have excellent credit with absolutely no debt with exception of the mortgage on my home.

I talked to an accountant yesterday to get his feel on LLC verses Inc. The way I understand it, an Inc. company pays everybody a salary (even if the company has only one employee, the owner). Also, and Inc. company also must pay its own taxes and then the people who get paid pay taxes too. According to my accountant, Incororation means you get taxed twice.

One the flip side, an LLC is not required to pay a regular salary to anybody....which is good, because I dont expect to make much money at first. Also, with an LLC, you dont have to pay taxes twice. Since I'm the only employee, and I will own the business, I get taxed once....but, I've got to pay self employment tax.

There was alot more the accountant said, but the bottom line was that for me, a one man show, in N.C., a LLC is the way to go from an accounting angle.

I have a meeting in the next day or so with a lawyer to get his take on this issue as well. I have found that the accountant will speak to tax issues, but in terms of protecting your personal assets, a lawyer will speak to that. I will update when I know more.

 

[KIDS]

LLC, Inc., etc. There are no simple answers to this question. Sitting down with the right attorney can help. Now comes the gift, finding the right attorney. I started a company and wanted to protect myself and family from personal liability. I want to keep my home! So I interviewed at least eight attorneys from tax, general, and even an engineering attorney. Then collectively picked one. I don't think any attorney will know all the answers. So you will have to select one that meets your needs and goals. Good Luck.

 

[ml13]

There are a couple of issues that are interrelated. There is the liability shielding that RDK talks about and there are the taxation issues as well.
We are an S-corporation: we are shielded legally through the corporation, but we are not "double taxed" like a C-corporation. Sounds nice, but my partner and I, after our first year, had a net profit of around $50,000. As a result, we each had to claim $25,000 of income, through form K-1. Mind you, we kepth money in the company account--it wasn't actually money that we took home to buy diapers. But we had to claim it nonetheless. So we are in essence paying taxes on non-spendable money. I don't know how LLC's, LLP's or p.a.'s operate, but we are thinking about changing our corporate status.

It seems to me you need to find out what is most important to you: being shielded from liability or from taxes, or a little of each. Answering that question will proabably lead you into one naturally.

Another thought is to find an accountant and attorney and ask what other engineers in your situation have done. If one type is predominant, you might be wise to do the same.

 

[kvillebasser]

Update-

I have talked to an attorney now. Unfortunately, getting good legal advice is not easy. I was directed to this attorney thru my accoutant. I asked the attorney, "Which way should I go, I'm going to be a "one man show", maybe a few years down the road hire a draftsman and maybe hire one engineer, should I be Inc. or LLC"?

Seems like a simple question.

His answer was "on the fence" at best. He, in a very sketchy manner, half-way described how each operates, but gave me no advice as to how each might shield my personal assets should I be sued. I came away from the meeting knowing nothing more than when I went in. I am going to look for another lawyer.....as I am not happy with this one, as his competance in this matter seems questionable.

I told my wife last night, even in a professional workplace, its hard to find people who really really know their craft.

 

[BJC]

kvillebasser
Lot's of books out there on the subject. The best I ad I've lost and it was by a mechanical engineer on the faculty of MIT.
I have gotten the following advice along the way.
1. LLC or INC doesn't matter that much. If someone want's to sue you they can find a way. If your an officer of your own corporation they can come after you. The guy with the most and most expensive lawyers will win. Most of the time they don't come after engineers because of the blood/turnip principal.
You cna buy umbrella insurance policies that cover lots of things. You may have employees that sue you as well as clients.
One lawyer told me the best thing to do is leaglly hide your assets. If you live in a state where bankruptcy court can't take your house that's a plus. If your married in some states joint accounts can't be taken by bankurptcy courts or suits but you gotta trust the main squeeze.
This sounds irresponsible but one or two persons firms can't play with the big boys.
Insurance is a waste of time. There are ways to have your clinet's cover you. Insurance will cost you plenty, has a high deductable and is gone when you stop paying the premiums. Say you design a bridge, two year later win the lotery and retire, then the bridge fails ( for reasons that may not be your fault), the lawyers will be around you like buzzards on a on a dead mule.
You wnat the next lawyer you get to talk to you something like this. You want the lawyer to make up general contracts that keep you out of trouble and make the people you do businees with share the risks. There saving money by hiring you instead of a large engineering company with lots of overhead. They expect to assume a little more risk.

 

[Theophilus]

I've got an LLC. Moved from a sole proprietorship last year. Of course, I'm doing industrial design instead of structural engineering--different gig. Anyone can call themselves an industrial design--proof's in the pudding, not in the certifications.

Anyway, you might find this varies from state to state (or country). Laws are beginning to firm up on the protection offered by an LLC. I don't get taxed twice but I'm protected except by gross negligence--which a C-corp will not protect me from either, by the way.

So I do my job and design widgets and perform the engineering for them, source the production, and enjoy the benifits of the LLC tax structure. It's similar to sole proprietorship, but more separated from a liability stand point. There are limits, that doesn't make the LLC worthless.

I think most attorneys/accountants don't properly advise on the LLC because it has been around for less time than the other business forms. Perhaps they're too busy or too lazy to become adequately informed? Check with your state's corporation commission to see their stance on LLCs. You can file it yourself with your own bylaws. Often you can download the forms and all that is needed from the corp. commission web site and file the whole gig for less than $100. (And don't go through Nevada unless you operate there.)




Jeff Mowry
Industrial Designhaus, LLC

http://www.industrialdesignhaus.com

 

[kvillebasser]

I'm going the LLC route. As advised in this thread, I went to the Sec. of State here in N.C. and finally got some good information about what an LLC is and how it is different from a company that is Inc.

There are pros and cons to both, but the LLC is right for me. In addition to the advantages it gives me in terms of taxes, liability, and simplicity of organization, it will also save me about $2K a year in accounting fees, as I will not have to submit anything to the IRS on a monthly basis, unlike corporations.

In North Carolina, its really a PLLC rather than a LLC. Its a Professional Limited Liability Company. The PLLC is set up for professionals such as engineers. The PLLC also outlines more reasons why a person can come get your personal assets if you are found guilty of certain poor business practices....such as malpractice, negligence, etc.

 

[ClydeMule]

If you are in CA then I would incorporate. I chose that over LLC for my business for the cost and liability. It was about $500 to setup because I did the deluxe package online with one of those companies that sets it up for you.

In CA there are a lot of LLC fees that can actually be higher than Inc. for a small outfit.

I also build refrigeration equipment, so I wanted a higher degree of protection. I also have a lot of liablitiy insurance.

clyde

 

[Maui]

On a side note, liability insurance is required regardless of which type of company you choose to form, whether LLC or INC. In New York, or any other east coast state, what are the typical premium rates that you can expect to pay per million dollars of coverage for a single engineer opening up his own consulting business? Obviously, shopping around will get you the best rate, but they are probably very similar in cost from one carrier to the next. What should you expect to pay, on average?

 

[cah2oeng]

Clyde (or anybody who knows, for that matter),

I'm in the process of researching the LLC/inc. question for a Civil Engineering start-up in southern CA and I'm having trouble finding out if LLC is even an option for me. There is some sort of "restriction" on LLC's in CA for "professionals." I'm not really sure if engineers are conidered "professionals" in CA yet, but I'm just wondering if anybody has input on this issue.

Also... for BJC... what the hell is the blood/turnip principle? (I actually googled it, but I'm drawing a blank here, man.)

 

[jmw]

Can't get blood out of a turnip... engineers are too poor for them to be worth a lawyers time?

Just guessing.

JMW

http://www.viscoanalyser.com

Eng-Tips: Pro bono publico, by engineers, for engineers.

Please see FAQ731-376 for tips on how to make the best use of Eng-Tips Fora.

 

[ClydeMule]

ce621a,

I don't think engineers count as professionals in CA. When they talk about LLPs they are usually referring to lawyers and accountants.

In terms of Inc. Vs. LLC I don't think it makes a difference in terms of you license.

The DCA will have more to say about that than the Sec. of State.

Where are you in So. Cal? I am in Escondido. Call me on monday if you want to ask me any questions. I am no expert, it is just that I did this in March.

Regards,

Jeff Johnson, PE (aka ClyeMule, long story.)
Johnson Thermal Systems, Inc.
760-489-9920