By Fredrick P. Niemann, Esq. of Hanlon Niemann, a Freehold, NJ LLC Attorney
There are a number of benefits to operating a business as a sole proprietorship. Sole proprietorships are easy to form and operate and cost little to create. There are a few administrative costs and burdens, and income and losses are simply reported on a taxpayer’s Form 1040, without the need for a separate tax return filing. The most significant disadvantage to a sole proprietorship is that there is no limited liability for the owner as its proprietorship status exposes your personal assets to the risks and liabilities of your business operation. Most states, including NJ, allow a sole proprietor to conduct business as a Limited Liability Company (LLC). Simply said, converting to a single member LLC and then treating it as a sole proprietorship for tax purposes is a low cost way to address this disadvantage without losing any of the advantages to operating as sole proprietorship. The intent is to provide a broader protection from legal liability.
The concept behind all the LLC statutes across the country, including NJ, is that the owner (called a “member”) does not have any personal liability for business debts solely by reason of being a member or owner of a for profit business. But remember, this: whether a sole proprietor or LLC, you are not immune from claims of others as the owner for your personal actions for any debts personally guaranteed. But your personal assets will be protected from claims arising because of ordinary business transactions. This liability protection is advantageous if you have employees working in the business as their actions may expose the owner’s personal assets to lawsuits.
Another attractive aspect of LLC status is that IRS regulations allow the owner to continue reporting LLC income for tax purposes as a proprietor, despite forming an LLC under state law. Gaining the extra legal protection of an LLC entity will not entail any extra tax filings with the IRS.
If an owner conducts business as an LLC, it will be necessary to consistently use the LLC designation on business letterhead, the business checking account, business licenses, and the like. The owner or someone needs to go through the process of adding the LLC designation to the various contracts and documents under which business is conducted. This is an absolutely non-negotiable obligation to avoid future personal liability if someone claims that they believed they were dealing with you personally rather than your company (see the many blogs on this website that address this issue.
To discuss your NJ LLC matter, please contact Fredrick P. Niemann, Esq. toll-free at (855) 376-5291 or email him at fniemann@hnlawfirm.com. Please ask us about our video conferencing consultations if you are unable to come to our office.