For those of you that lease/own a retail location, which business entity are you operating under?
I work out of a licensed kitchen in my home, and I'm a S Corp. Back when I incorporated LLC had not been approved in my state. There are some advantages to either, and an online search should tell you about each. If by Sole Proprietor you mean not actually incorporating, uh, no, don't do that.
go to your state's website and there should be info on starting a business, with info on all types of entities, the pros and cons. You may even be able to incorporate online and never have to visit your state offices.
Based on what your state offers, it's a tossup between Corp and LLC. Make sure to check out the taxation requirements for each type.
Don't go for an SP. That will mean that you are liable for business losses - and lawsuits. In Corp and LLC, only the business (and your liability insurance) are liable.
My advice is to find a lawyer who specializes in small business law in your state. The dollars spent will be well worth it. You will have the peace of mind of knowing that the information you receive is from a knowledgeable legal mind. He/she can help you with a multitude of details that need to be addressed before launching your business--including whether to become an LLC, sole proprietorship, etc. Good luck!
Life is risk. Opening a business is riskier still. There are plenty of boogeymen to go after you--leave them in the shadows for a moment.
You will definitly have financial loss the first year maybe the first few years--that is for sure. With sole proprietorship you can deduct all your business losses (and they will be legion) from your personal income.
Sure you might get sued by somebody. But weigh that against the certain financial loss you can't deduct if you incorporate.
I'm SP--I'll incorporate later when I get past the losses incurred in the launch of a business.
Why pass up a sure thing and take a certain financial loss to hedge myself against a maybe.
Take the plunge, baby! Come on in the water is freeze freakin' cold--
Tax food for thought/breakfast.
Corporations can deduct losses for tax purposes too. You should definately consult an attorney for your best option though. I'm with Leahs on the S Corporation. It gives you the benefit of limited liability without having double taxation... by that I mean that as a corporation, you have to pay business taxes and then you have to also pay personal income taxes on any money you pay yourself as a salary. I believe with S Corp, you only pay taxes as you would with a sole proprietorship (based on the overall income of the business). Since Leahs is living and breathing this, she could probably give more details on how it works. It has been a while since I have done taxes and the laws may have changed significantly so don't flame me please. I am an accountant by day and caker at night.
Not to knock anyone else, I would probably not open any business that wasn't incorporated. You assume a lot of risk. The most you could lose from your business in the event someone gets hurt or you get sued is your business. Granted that is a lot, but that is the limit. As a sole proprietorship, you could lose your business, your house, your car, and any future income.
But definately talk to an attorney. He or she can give you very good advice on how to protect your assets and your income.
We are going with LLC. I had an S-Corp several years ago when I had a management consulting company; it was great because I could afford accountants to take care of everything at that time.
For the cake business, we compared the two and decided since we are just starting the business, it was easier for us to file our own paperwork (I have the draft paperwork done and it took about 6 hours on the state site), do our own taxes (simple pass-through, minimal state filings), etc... with an LLC than an S-Corp.
I did consult my old accountant and he advised against the LLC (remember LLC is Limited Liability Company - there are several outstanding court cases on what 'limited liability' means - I'm hoping these are baseless and don't set any precidence; also, he seems to think I'll be making the same $$ - which I won't be so I can't afford him - maybe later... ).
For a basic comparison, check out legalzoom.com
For moi, the less mumbo jumbo the better. Incorporating (alone) took 6 hours for our CakeBuddy upthread. There is a substantial increase in the amount and complexity of record keeping you must endure on an ongoing basis to incorporate. And, once again all you get is a hedge againt a potential lawsuit.
I mean I'd rather have an easier time with the paperwork and red tape at the beginning. I mean watch your p's and q's--don't do copyrighted stuff, know and adhere to the rules & regulations for sanitation--You'll probably be fine.
Life is risk.
But don't let fear of the what if's motivate you. Few cakers get their pants sued off. The only ones I know of broke copyright laws.
SP, aka sole proprietorship, is what my Small Business Admin guy advised me to start at.
Incorporation is cool but, dude, I'm just selling a few cakes.
If you are in a full blown bz with a coupla dozen employees--probably a good idea to incorporate.
Besides there are certain circumstances when certain of the corporations cannot hedge you anyhow against personal loss. I neither want to pay a lawyer nor do I want to learn that much tax and business law myself. I just wanna make some pretty cake and make some people happy.
i'm livin on the edge with K8...i was an s corp for the first couple years...good lord they sent me so much paperwork to fill out and it was so complicated it was scarey...it really stressed me out, not to mention it cost me 500 bucks to incorperate.
now i'm a sole prop.
like k8 said life is risk....i thought about it a lot, what really is the likelihood of getting sued? i was willing to take the risk....all the complication of all that paperwork, and worrying if i was doing everything right was just not worth it (for me)....it is SO much easier.
geeze people survived hundreds of years doing business without all this complication they have us thinking we must have.
on this site someone said they were a court reporter for years....and said "people sue for all kinds of things."...i asked her over the years how many she knew of that sued over food issues....
I have an LLC and honestly... the paperwork was SIMPLE and taxes are no biggie either. I wanted to keep the records for home and biz separate and I didn't want the headache of a full on corporation since I am small. Going LLC took no time at all... the paperwork wasn't bad... and it give you peace of mind.
I am hoping to incorp. by the end of the year or beginning of next year and I will incorp. as LLC. The taxes pass through to you and you can benefit from taxes as a SP. They are similar but do some research. I recently bought a book NOLES I think it is by and it really simply explains the difference between Corp S, LLC, and SP (it is at home so I do not have the exact name). (Borders books has it). I would not want to assume the risk of being sued if I am making a wedding cake or serving any big party. I have a family - husband and young children I need to protect and that risk is to high for me to assume. Good luck in your decision.
I am struggling with this right now. I just passed inspection and am now a legal home bakery but I want some legal covering before I get going. I thought LLC was the way to go but it looks like there are some tax differences that I dont like. I will have to look into it some more.