Ready to change from Sole Proprietor to .....

Hi, I need recommendations for my business plan:

I've been a sole proprietor and I am ready to change it so I can give a turn to my business, accept more clients, and offer more services.

Is LLC to file as disregarded entity or as an S-corp better? Or is there anything I should be aware of before I file for LLC treatment?

My plan is to allow somebody else on board in the future as a shareholder, or partner, as the company gets bigger, or maybe if I end up handling everything myself, I won't need anybody, other than for secretarial work.

What type of business entity are you all, and what do you recommend?

I am in south IL.

I vote LLC over S-corp because as a one member owner you will be a disregarded entity. When you do decide to get a partner your choices are to stay as a LLC or convert to S-corp. If you just get seasonal help then LLC will do just fine.

Having said all that please check your state rules as they vary state to state.

What problems have you encountered with the sole proprietorship?

What benefits to you hope to realize from a different entity that you cannot get from SP?

What problems have you encountered with the sole proprietorship?

What benefits to you hope to realize from a different entity that you cannot get from SP?

I have not encountered any problems! I am just thinking about the liability aspect if anybody decides to sue me. I was also adviced by the Small Business Development to contact one of the recommended lawyers to make the change. Before I even go to a lawyer, I want to know what I'm gonna ask for.

Do you recommend to stay as a SP? Do I only need to buy insurance?

Does a limited liability entity protect you from lawsuits for your acts as a professional person? I believe here in NC it does not. For that reason, I have always been a sole practitioner. The money I save from paying the state $200 per year for the "privilege" goes to better insurance coverage.

Note: I am not a lawyer.

The prior post from Sumwunlost really emphasizes the state-by-state comparison. In Texas, the annual franchise tax fee ("privilege tax") is -0- when gross receipts are less than $1,180,000. So for a small starting operation, makes no difference after the original setup. The original setup for a single-member LLC can probably quite safely use the on-line forms available, so we are only talking about the cost of the filing fees. A more detailed member operating agreement can be done later if the OP brings in someone else in the future.

So OP really needs to check out how things work in Illinois. NOTE- I am not a lawyer either.

Consideration should be given to both the quantitative and qualitative.

The quantitative is up in the air as you haven't provided any numbers. i.e. taxable income and reasonable comp.

In the wake of the TCJA, I'm less fond of S Corps than I used to be. The teeter-tooter dynamic between reasonable comp and QBID, the need to run payroll regularly, the additional tax return, assets trapped inside a corp. Just unattractive IMO compared to sole proprietor/DRE.

My vote would be an LLC taxed as a DRE absent a compelling quantitative reason. If you bring in partners in the future, it becomes a partnership and that gives you a lot more allocation flexibility. And, if an S Corp made sense at that time, you could always form a wholly owned S Corp between you and the partnership if needed.

Does a limited liability entity protect you from lawsuits for your acts as a professional person?

A lot of states don't give liability protection from professional malpractice via a legal entity. It's a good point, but not a dealbreaker IMO.

I'm going to transition from sole proprietor to LLC taxed as a DRE soon. Annual registration in my state is $50 after the first year, so it makes a heck of a lot of sense.

There are three downsides to the sole prop (IMHO)

You pay SE tax on your SEHI

You pay SE tax on your retirement contributions.

Your retirement contribution is limited to 20% of earned income (SEP and 401k profit sharing) and the retirement contribution reduces QBI.

For an established business, the income tax and FICA savings can be in excess of $5,000 per year.

Bringing this back up.
I discussed this with my attorney, and there were similar rules in NY.
A legal entity would not protect me from work I performed in a professional capacity, personally.
If I had employees, and I properly trained and supervised them (not negligent) then an entity might offer me some protection.
-
I opted to file a DBA and remain sole prop for now. If I have employees I will probably go LLC DRE.
The NY LLC filing fee for a DRE is $25 no matter the amount of gross receipts.
-
In these situation where you are looking to provide yourself with less exposure, I think insurance is the key.
Also not a lawyer.

Insurance, not engaging in risky behavior, and always making sure everything is done above board is always going to be the first line of defense.

If you see yourself going S Corp eventually, it might make sense to get an LLC in place sooner rather than later. Then, when you're ready you can just file a 2553 and don't have to worry about a new EIN, new bank accounts, etc.