Small Business Start-up/LLC

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Small Business Start-up/LLC

I currently have a sole proprietorship business counseling practice. My wife and I are also starting another business amazon seller. Should we keep the sole proprietorship business separate or should we combine both into an LLC. What would be the best for tax purposes?

Asked on July 29, 2017 under Business Law, Washington

Answers:

SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 6 years ago | Contributor

There is no tax difference--the taxes you pay is a function of net income or loss (receipts less expenses, producing either a taxable gain or tax deductions), not the number of income streams or how many business structures or entitites you have.
You should have *all* business under LLCs--that will protect your personal assets (e.g. house, car, money in the bank) from most (but not all; no protection is perfect) business debts, obligations, etc., apart from those you personally guaranty. For example, say a disgruntled client sues you: if you are a sole proprietorship, you have to pay out of pocket, and if you can't, they could put a lien on your home; but if the business were an LLC, all they could get are the LLC's assets or money, not your own.
There are pros and cons to having one LLC or having a separate one for each business:
One LLC--the pro is you can more readily deploy assets (i.e. use money from one to pay bills of the other) and have more capacity to make use of business expenses as deductions. (To oversimplify: you can't use more deductions than you have income to apply them against. Say you have business 1 which had $100k income, $10k expenses, and start-up business 2, which had $10k income and $20k expenses. If each is a separate LLC, 1 can take $10k of expenses as deductions against its $100k income, but 2 can only take $10k of its expenses against its $10k income and you lose the benefit of $10k of deductions. But if the two business are under one LLC, it's a net of $110k income ad $30k expenses, so you can use all $30k as deductions.)
The con of putting it all under one LLC is that if one of your business ventures has a large debt or obligation, then the assets and income of the other one is at risk, too, since it's all one LLC.
Separate LLCs--it's the opposite of the above: you have less flexibility about using the money or business expenses of one LLC for the other, but each business is protected from the other's liability or debts.


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