Law in the Marketplace: Should you do business as a sole proprietorship? - Concord Monitor
If you conduct your business in New Hampshire as a state-law sole proprietorship (referred to by many business owners, and usually referred to below simply as “sole proprietorships”), you owe it to yourself to decide whether you should instead conduct your business as a single-member LLC. It’s a very important question for every individual conducting a single-owner business.
In this column, I’ll outline the legal issues you should consider in resolving this issue for your business. In my next column, I’ll outline the relevant federal and New Hampshire tax issues. But first, a couple of definitions:
A New Hampshire state-law sole proprietorship is a type of business organization that comes into existence automatically and without any state filing when an individual begins a business in New Hampshire without using a state-law business entity to conduct it. The main types of New Hampshire state-law business entities are LLCs, business corporations, general partnership, limited partnerships, and registered general and limited partnerships.
However, the term “sole proprietorship” has not only a legal meaning but also a quite separate federal tax meaning — namely, as referring to entities whose owners are subject to federal tax liabilities as individuals. These entities include both state-law sole proprietorships and single-member LLCs. Thus, if you do business as a sole proprietorship, you very probably conduct your business as a state-law sole proprietorship (legal name) taxable as a sole proprietorship (tax name).
A single-member LLC is a single-owner business entity that you form by filing a certificate of formation with the New Hampshire Secretary of State. New Hampshire single-member LLCs are governed by the Revised New Hampshire Limited Liability Company Act. The filing fee to form and maintain a single-member LLC is $100 in the year of filing and in each subsequent year.
The main legal advantages of sole proprietorships over single-member LLCs in conducting New Hampshire businesses are these:
Easy creation. Sole proprietorships are literally effortless to create; to create one, all you need to do is to start and conduct a business without the use of an entity.
No cost to create. Sole proprietorships cost nothing to form. As indicated, you need to pay a New Hampshire filing fee to create a single-member LLC, and you shouldn’t conduct your business as a single-member LLC unless you first hire a lawyer to plan and draft an LLC operating agreement. Your legal fee may well be several hundred dollars. (In my view, operating agreements from companies like LegalZoom and Rocket Lawyer are not suitable for use in New Hampshire.)
No need for separate books and records. You don’t need to keep separate books and records for your sole proprietorship and for yourself as an individual. In order to minimize the risk of veil-piercing, you do need to keep separate books and records for yourself and your single-member LLC.
No statutory rules. The main legal rules that sole proprietorships need to obey are common sense rules such as the avoidance of business negligence. The statutory rules that govern members of single-member LLCs are also relatively simple, but they are much more numerous and complex than sole proprietorship rules.
The main legal advantages of single-member LLCs over sole proprietorships are these:
Statutory liability shields. Single-member LLCs provide their members with a statutory liability shield. This shield protects them from claims against their business by third parties unless these claims are based on their own personal misconduct. If even only one employee works for your business, you’ve got to conduct your business as a single- member LLC, because if your employee does anything that results in such a claim, you yourself will be personally liable for the claim even though you’ve done nothing wrong. You won’t be liable if your business is a single-member LLC.
Assistant managers. If you conduct your business as a single-member LLC and you have a well-drafted LLC operating agreement, the agreement will provide, both for you and for third parties, that although you are the LLC’s manager, your LLC also has a non- member assistant manager. If your business is a sole proprietorship, you can achieve the same result with a power of attorney and perhaps by other means, but third parties may or may not find these means acceptable.
Avoidance of New Hampshire probate. The above LLC operating agreement can also provide that upon your death, your membership will pass to your successor without any need for New Hampshire probate by virtue of the New Hampshire Transfer on Death Security Registration Act. For your successors upon your death, the New Hampshire probate process can be lengthy, administratively complex, and costly. If you conduct your business as a sole proprietorship and you die, your successor will have to face New Hampshire probate.
Next week: Sole proprietorships vs. single-member LLCs — the tax factors.
John Cunningham is a lawyer licensed to practice law in New Hampshire and Massachusetts. He is of counsel to the law firm of McLane Middleton, P.A. Contact him at 856-7172 or [email protected]. His website is llc199a.com. For access to all of his Law in the Marketplace columns, visit concordmonitor.com.
source: https://www.concordmonitor.com/Law-in-the-Marketplace-44632588
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