When to Transition From Sole Proprietorship to LLC
Are your interior design projects becoming larger? Are you starting to wonder about liability? If your answers are “yes”, that’s great, your instincts are in the right place. As projects grow and you acquire bigger clients, you may find yourself thinking “is it time to graduate from being a sole proprietorship?” If you’ve come to this roadblock, it’s time to start consider graduating from sole proprietorship to LLC. We surveyed a group of Ivy interior designers (87 to be exact) and 69% of the businesses are LLC, 21% are sole proprietorship, and 10% are S Corp. Before you start feeling ‘more legit’ and dive into your state registry, review this simple breakdown for what it means to be a sole proprietorship or an LLC.
Written by Shai Wallach
Sole Proprietorship
This is the most common form of company due to the simplicity in starting a sole proprietorship. With almost no startup cost, the business is run by a single individual and has no distinction from its owner. Taxation is easy in a sole proprietorship, as the business is not taxed separately from the owner. Sole proprietors reap the benefits in profit, but are also responsible for losses and all the liability that comes with the business. Though this is the easiest way to start up a design firm, with larger projects coming up and firms growing in size, unlimited liability can become a risk for any sole proprietor designer when lawsuits put their personal assets on the line.
Limited Liability Company (LLC)
This is where the LLC comes into play. Like its name alludes, an LLC is a separate legal entity and therefore protects its owners (which are called “members”) and their personal assets from business-related liabilities. To form an LLC, you must file Articles of Organizations; many states have fill-in-the-blank forms on their websites. Aside from filing fees, which usually cost several hundred dollars, states often charge annual fees under the state’s law.
Before making the switch to LLC, we highly recommend reaching out to both your CPA and attorney to find out about how your state deals with LLCs. Fees and tax specifications differ state to state so this can get tricky. It’s much better to make informed decisions than trying to do this yourself via LegalZoom. It’s OK to not know everything about the local tax laws in your area so it’s always safe to consult with a professional who can steer you and your business in the right direction.
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