Understanding The Legal Differences Between A Sole Proprietorship And An LLC

If you are thinking about starting your own construction business, one of your first appointments should be made with a corporate lawyer. This type of professional deals with the specifics of a business and how the business can reduce liability issues. One of the most basic things that a corporate lawyer can help you with is deciding on the type of business that is best for you. Keep reading to learn about two business types and what they mean legally.

Sole Proprietorship

A sole proprietorship is the simplest type of business to start and set up. This type of business is owned and run by you alone. This business allows you to receive all profits, but you are also responsible for loans, bills, losses, and liabilities. You do not need to do anything legally to set up the business besides acquiring the permits, licenses, and insurance to run the business.

If you choose to use a name other than your own, then you will need to register the name. This is called a doing business as (DBA) filing or a fictitious name filing. For example, if your company name is Joe's Construction and your name is Joe Smith, you will need to file a DBA certificate to connect the business name with you, the business owner. You will then be Joe Smith doing business as Joe's Construction. This is often necessary for banking and tax purposes.

You can set up a sole proprietorship on your own, and this may be best if you are completing construction jobs by yourself. However, you should understand that you will be solely responsible for any sort of liability issues that pop up. For example, if you construct a foundation for a home that later fails, the homeowner can sue you directly for damages. Since there is no distinction between you and the business, you will be on the hook for the costs if the homeowner wins the lawsuit. In fact, the homeowner can sue your business or you directly, or both your name and the business name will be on the lawsuit paperwork. This means that your direct assets, which have nothing to do with the business, can be used to pay for costs if there is a need. You simply do not have any protection under the law when it comes to a DBA or sole proprietorship business. 

Limited Liability Company

A limited liability company (LLC) can still be constructed if you are a single person starting a business, and it can also be formed if there are several people starting a business together. If you have this sort of company, you will be a member of the business. While you are considered a member, you will effectively still be an owner of the company. Profits and losses will go through the business and will be separated and received by all the members. The profits are reported on your tax return as personal profits. This is very similar to the way that sole proprietorship works, but you will essentially be paying yourself from the business profits that are received.

It is a bit more complicated to form an LLC, and it is wise to work with a corporate lawyer to make sure that everything is done correctly. You will need to choose a unique business name. The business name must be one that has not been used in your state before. Your lawyer can help you with the name by searching a database of LLCs and corporations that already exist. Articles of corporation paperwork must be drafted, filled out, and filed. Filing varies by state, but your attorney will know which state or department entity must receive the documents. Operating agreements may be needed as well if there is more than one member of the LLC.

The biggest advantage to going through the trouble of forming an LLC is the fact that your personal assets cannot be taken to pay for the losses or liabilities of the company. For example, if you take out a loan to start your business and the business fails, your bank cannot make you recoup their loss. You will likely need to sell off construction equipment, supplies, and the business building itself. But if there is not enough money to pay off the debt, the bank cannot go after you to sell your home, car, or any other personal property. 

For more information and help setting up your company, contact an experienced lawyer with a firm like Carter West Law.