The Small Business LAB Podcast

From Sole Proprietor to LLC: Making the Right Choice

• Kayla Reilly

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Ever wondered how to protect your personal assets while optimizing your business finances? In today's episode, we unpack the often-overlooked decision of formalizing your business structure. Through personal experiences and expert insights, I illustrate why choosing the right structure—be it a sole proprietorship, LLC, PLLC, or PC—can be a game-changer for your entrepreneurial journey. By consulting a business coach or lawyer, you can make informed decisions that offer significant tax benefits and safeguard your future.

Beyond legal protections, we dive into how formalizing your business boosts credibility and opens doors to new opportunities, even for the smallest enterprises. Debunking common misconceptions about complexity and relevance, I provide a straightforward guide to selecting the right structure, filing the necessary paperwork, and maintaining compliance. With practical tips and personal stories, this episode makes the case for why formalizing your business is crucial for continuity, access to funding, and building business credit. Join us to learn how taking this critical step can set you on the path to long-term success.

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Speaker 1:

Hey, hey, I've got a really good topic. I've been talking to a lot of people who haven't started their business yet, or who have started and are kind of working solo and just haven't formalized things. Let's chat formalizing your business structure. Now, I know this might not sound like the most glamorous topic, but trust me, it's one of the most important decisions you can make for your business. Picture this you're running a successful business from your kitchen table, juggling clients, kids and everything in between, but have you ever thought about what would happen if somebody sued you, or how much money you might be leaving on the table come tax time? If you haven't, don't worry, you're not alone. Today we're going to break it all down and explain why you need to consider setting up an LLC or PC for your business. What's up, boss? Welcome to the podcast where we spill the tea on automating your business, juggling work and home like a pro and finding more time to do the things you actually want to do, because time and energy are the ultimate currency and money. Well, that should be working for us, not the other way around. Hey, I'm Kayla, your resident licensed therapist turned business badass. I started as an employee for someone else, but now I've got a seven figure practice that practically runs itself, leaving me free to wrangle my little ones and help entrepreneurs like you on how to do the same. Whether you're just getting started out or ready to trade in the hustle for something that looks a little more like freedom, I'm here to help you make more money with less time and stress. So if you are ready to stop the grind and start living your best life both at home and in business, you're in the right place. Let's do this. All right, let's start with the basics. What are the different business structures and why should you care?

Speaker 1:

A sole proprietorship is probably the most simple and common form of business ownership. It refers to a business that's owned and operated by a single individual without any kind of formal legal structure like a corporation or a partnership or an LLC. In a sole proprietorship, there's no legal distinction between you, the person, and the business, meaning that the owner is personally responsible for all the business's debts, liabilities, obligations, et cetera. The income you generate as the business is also considered personal income to you, and taxes are filed as part of your personal tax return. So the key features of a sole proprietorship is it's owned by one person. Liability. The owner has unlimited personal liability for the business's debt and obligations. Profits are taxed as personal income to you, the owner, and there's no formal action or filing.

Speaker 1:

Nothing's really required to start a sole proprietorship, although some local permits or licenses might be needed depending on the nature of your company. So imagine, like if you're a hairstylist and you're renting a booth at your local salon and you're offering your services to your clients, if you don't form an LLC or a corporation or a partnership, you simply just start working as you. In this case, you're operating as a sole proprietorship. All the money you earn from your work is going into your personal income and if your client doesn't pay, you're personally responsible for your financial loss. If someone sues you, your personal assets, like your house or your car, could be at risk because there's no legal separation between you and your business. So in the real world, many small businesses like hairdressers or other esthetician workers or therapists a lot of them work as sole proprietors. An LLC or a limited liability company is one of the most popular business structures for small business owners. It really offers that flexibility of the sole proprietorship, but it gives you an added benefit of protecting your personal assets. That means if the business ever faces a lawsuit or a debt, your personal assets, like your house or your car or your savings account, are protected. Now, if you're a licensed professional, like a therapist, lawyer, doctor, you'll need to set up a PLLC or professional limited liability company or a corporation PC, professional corporation. These structures are specifically designed for licensed professionals and add an extra step you have to register your business with your professional board. This ensures that your business complies with those industry regulations and standards.

Speaker 1:

When I was setting up my business, I initially wanted to open as a wellness center with massage therapists, acupuncturists, reiki healers, et cetera. I asked my CPA about it super informally, but I neglected to do my own research or consult a business coach or a lawyer for guidance. I ended up opening a PC instead of a PLLC because, solely because it had a cheaper yearly fee I think it was like 50 bucks a year instead of 150 bucks. I was like, all right, I'm saving a hundred bucks. It's practically the same thing. Fast forward several years and I learned that what I didn't realize at the time was that corporations require a lot more documentation, meeting minutes, other formalities, which quickly ended up becoming an additional expense that I hadn't calculated, so it ended up being a hell of a lot more expensive than $150 a year. Anyways, this is just one example of how we learn as we grow, and it also highlights why business coaches or lawyers are worth that proactive expense rather than dealing with reactive costs and decisions that might end up being both energetically and financially costly.

Speaker 1:

So whether you choose to do an LLC, a corporation, a PLLC, a PC, it really depends on your profession and your business needs. But either way, formalizing that business structure from a sole proprietorship is a crucial step towards protecting yourself and your business, and in addition, there's a lot of tax incentives. So let's keep talking. Now let's talk more about taxes Everyone's favorite topic, right? No, but seriously, this is where formalizing your business can really pay off, literally in your bank account.

Speaker 1:

When you set up an LLC, you get what's called a pass-through taxation. This means that the business itself isn't taxed. Instead, profits and losses pass through your personal tax return. This can potentially lower your overall tax burden because you're only being taxed once at the personal level, not both the business and personal levels like a corporation. Here's the kicker. Having a formal business structure opens up more opportunities for tax deductions. We're talking deductions for things like health insurance, retirement contributions, everyday business expenses, like your products if you're a hairdresser, or for a therapist, like notepads and pens. Right, imagine being able to write off your home office, that fancy new laptop, part of your utilities. It's all possible when you have an LLC or a corporation. Plus, if you choose to have your LLC taxed as an S-corp and be mindful that this is true for corporations as well you can save even more on self-employment taxes as well. You can save even more on self-employment taxes. This is where you pay yourself a reasonable salary and any additional profits can be distributed as dividends basically just like I call them distributions when I just give myself money and these aren't subject to self-employment tax. This strategy alone can save you a nice chunk of change when it comes to tax season.

Speaker 1:

Okay, let's get into the nitty gritty of legal protection, because if you're anything like me, the idea of someone coming after your personal assets is the stuff of freaking nightmares. One of the biggest reasons to formalize your business structure as soon as possible with an LLC or a PC is personal asset protection. When you operate as a sole proprietor, you are not doing any kind of distinction between you and your company. That means if your business is sued like, hey, I'm suing you. I don't know, erica, for when I came to get my hair done I tripped and fell and burned my face on your hot iron, which was already hot. That would never happen. But I'm just saying I'm suing you. And if she's a sole proprietor, then her personal assets are part of the shebang when we go into a lawsuit. Assets are part of the shebang when we go into a lawsuit. Now, if she was an LLC or a corporation, your house, your car, your savings they're all safe. Your company might go down. But if your company goes down, you can always open another company, you can walk away, you can have you know, a life moving forward. But if you get sued and you lose and you lose all your personal assets because you never created an LLC or a corporation, you know well that would really really suck.

Speaker 1:

It's not just about the protection either, it's about credibility. When you have that LLC or PC after your business name or corporate ink, it adds a layer of professionalism and legitimacy. Clients, suppliers, potential partners they'll all see that you're more serious about your business, which really can open doors for you and opportunities for you in your company's future. When you have a formal business structure, entering into contracts, securing loans, bringing on partners, it just all becomes a lot smoother. You've got that legal backbone that shows that you're established, you're ready for business and you're a professional.

Speaker 1:

Some other key benefits that might not be on your radar yet are business continuity, access to funding and building business credit. So, first up, business continuity. Formalizing your business helps with continuity, making it easier to transfer your ownership, bringing on investors or even selling your business in the future, which might be a dream of yours now it might not be. However, things change. The me that was 10 years ago is a completely different woman than the me that is now right. So if you formalize the structure, you can pivot a lot easier in your future. Also, if something happens to you or you decide to step away, having that formalized business structure makes it much easier to ensure that your business is going to keep running smoothly even without you. Then there's access to funding. So banks and investors are more likely to work with businesses that have a formal structure, because it shows that you've got your shit together. It's a sign that you're stable, you are professional. It makes it easier to secure loans and attract investments. Loans really become powerful when you're looking to scale. You become powerful when you're looking to scale.

Speaker 1:

Lastly, building business credit With an LLC or a corporation. You start building business credit separately from your personal credit. This is huge because it allows you to keep your personal and business finances separate, which is always so, so smart Legally and tax-wise. It's really really smart to keep them clean and I know a lot of people that do a lot of personal shit, like I'm going to buy my own lawnmower and say that it's a business expense. Don't do that nonsense. Don't do that nonsense. There is a legal way, a perfectly by-the book way to make smart decisions and tax deductions without muddling up your personal and your business finances. That sounds like a totally separate podcast which will go on the list right now, but when you have that formal business structure, it becomes its own entity which has its own credit score. That has been really powerful for me.

Speaker 1:

Okay, I know some of you might be thinking, oh, awesome, yay, but this sounds super complicated and expensive. Let's bust some myths right now. Okay, misconception one it's too complicated. Yeah, there's some paperwork involved, but it's really not as complicated as you may think. In most states, you need to file. If you're filing for an LLC, it's called Articles of Organization. If you're gonna be a professional corporation or a corporation, they're called Articles of Incorporation. Real creative right and there's usually a small fee. But there are tons of resources out there to help you and it's a one-time setup that can pay off for you big time in the long run.

Speaker 1:

Me personally, I have a really good relationship with my CPA and that's one of the services he offers, so I think I paid him a couple hundred bucks to create my articles of incorporation and get my EIN, my tax number. Ein is really important. It's like a social security number for your company and that's what you would take the articles of incorporation and the EIN to a bank to open up a bank account for your company. I just did this with this new coaching company. I've started Woohoo For mompreneurs so exciting, all right.

Speaker 1:

Misconception two I'm a small business, I don't need this. I just plan on doing hair. It's just me. I'm never going to bring on anybody else. Okay, let me tell you, even the smallest business, the smallest of the small, if you are a hairdresser and you have three clients a week, you can still benefit from formalizing its structure, whether you're a solo therapist, a freelance writer, you're running an online shop. Having this LLC or corporation can provide legal protection, tax benefits and credibility that you just can't afford to overlook. If you are making less than $50 a year, okay, fine, I let you off the hook. But if you're gonna make anywhere over 50 bucks, look into this, do it. It really is worth it and it's really a lot easier than you might think. Okay, so you're convinced, let's do this.

Speaker 1:

Step one choose your structure. Decide whether you're going to go for an LLC or a corporation. Remember that if you're a licensed professional, you might have to do a PLLC or a PC and you have to go straight to your board for that extra little step, and you have to go straight to your board for that extra little step. Step two file the paperwork. You need to file the necessary paperwork with your state, like the articles of organization or the articles of incorporation. This usually involves paying a little baby fee, but it's straightforward and you can often do it right online very quickly. Step three do it right online very quickly.

Speaker 1:

Step three ongoing compliance. So, once you've set up your LLC or corporation, you need to keep up with the ongoing requirements, like annual reports, fees, maintaining good standing with your state and if you're a professional, maintaining good standing with your board I think I have to pay $25 a year to register my PC with my board, um, to keep it in compliance. So it's just something that I add to my Google calendar so that I don't forget, because there are so many things I have to do in a year I'm going to forget, so I just add that in there. It's important to stay on top of these things to keep your business in good shape legally, um, you can always outsource this. So, for example, I have a law firm that does my yearly minutes, so I have a meeting with them once a year that they keep track of. So they hit me up and they're like hey, it's time to have your annual meeting. And I'm like, okay, great, we hop on a zoom, they record them for me. That way I know that I have that legal protection that if anyone ever sues me, I can show hey, I'm a professional corporation, I follow the steps to be in compliance, I am legit, and that really helps add that extra layer of protection.

Speaker 1:

So, to wrap it up, formalizing your business structure with an LLC or a corp isn't just a smart move. It's freaking essential. It gives you tax benefits, legal protection and credibility that can help your business thrive. I want to encourage all of you every single one of you to take that next step in formalizing your business, if you haven't already. If you're not sure where to start, there are plenty of resources out there, or you can reach out to a professional for help and that's a wrap, boss.

Speaker 1:

Thanks for tuning in to the SB lab, where we balance work and home like a boss. Remember you have the power to build a business that not only brings you meaning, but also affords you time, money and freedom to craft your ultimate life. It's all about making small changes now that lead to big results later. So keep taking those steps, keep pushing forward and remember you've got this. If you're ready for more, hop over to my website, kaylarileycom, where I have freebies to support you in your small business journey. If you like what you heard, leave me a review. It's like a high five in the podcast world and don't forget to subscribe so you're ready to rock next Monday morning when the new episode drops. You don't want to miss these gems. Now. Get out there, make bold moves and show the world what it means to be a boss. I'll see you next time.