Sole Proprietors: You should be an LLC.

I was speaking to an accountant the other day who said that it possibly makes more sense for entrepreneurs making less than $50,000 to stay away from forming an LLC. The reasoning was that filing taxes is just easier when you're not an LLC and earning up to that much. But once you reach that $50k mark, he said that it then made sense to be an LLC or a corporation.

As a business law firm, I don't think we can really agree with that. As lawyers, it's almost true that if you're in business, it's better to protect yourself with an LLC or corporation. Otherwise, you're opening yourself up to potential liability without realizing it.

That said, entrepreneurs tend to do what they want, so if you haven't made the leap to become an LLC or a corporation, I would recommend figuring out if it makes sense for you to form one.

If you're a solo entrepreneur and you've been earning money doing work for others or entering into contracts, then technically you have been doing business in a personal capacity. In other words, if you enter into a contract as a sole proprietor, you then become personally liable for any outcomes (especially the negative outcomes) arising from the contract. In that capacity, you're also working as an independent contractor.

When you form an LLC, you'll enter into contracts under the name of the LLC (or at least you should be if you can do so). If you've signed the contract correctly to make the company rather than yourself liable (and there is a right and wrong way to sign contracts to ensure that), then the LLC acts to protect you, thus "limiting liability" to you as the member or owner.

One common misconception among entrepreneurs is that once they legally form their business, all of their obligations and contracts become enforceable against the newly formed business. That's just not true in most cases. Once you legally form your business, usually, you'll still be liable for any contracts entered into as a sole proprietor before you formed your LLC or corporation. That point is often just not known to most people starting businesses for the first time.

While it is considerably more difficult to run a legally formed business because you have to file quarterly taxes disclosing earnings (known as K-1s), submit certain state filings, and pay annual franchise taxes (depending on the state), it makes sense to have an LLC or corporation to protect yourself personally from various kinds of liability or even lawsuits.

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