Sales Person Independent Contractor worth creating LLC? (insurance, commission, small business)
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I am an indepenent contractor that sells wine for various small companies. I have been advised/suggested that since I work for several small companies that I should form an LLC. I would be the only member & have virtually no fixed or overhead expenses in this venture.
I understand the liability standpoint for small sole proprietership, but since I don't really have to purchase anything (aside from small office expenses like paper and ink) and my car milage/gas is reimbursed, is it really necessary or worth it for me to create an LLC?
Seems like the information is conflicting. Some say that the liability protection is worth it, but I can't see what I would need to protect as I have nothing invested, aside from potentially hitting someone with my car I guess while "working" but wouldn't my car insurance cover that? And some say that the legal expenses/taxation of an llc isn't worth it.
As an independent manufacturer's rep for a long time, my accountant advised that there was no net advantage to an LLC compared to operating as a sole proprietor DBA under my business name.
Like you, I had no employees, only a home office and took the standard deductions for the dedicated office space, equipment, communications, and mileage.
The LLC is but a minor hurdle to overcome to hold you accountable if there was a basis for a lawsuit, so the "corporate umbrella" isn't such a big advantage to you.
The LLC is but a minor hurdle to overcome to hold you accountable if there was a basis for a lawsuit, so the "corporate umbrella" isn't such a big advantage to you.
Its a huge hurdle.....
Also, why would you listen to an accountant about a legal matter?
Unless your accountant is a lawyer they shouldn't give you legal advice. Would you take accounting advice from a lawyer? The LLC doesn't offer tax advantages but offers greater legal protection advantages.
If you get sued as a sole proprietor they can go after your personal assets (car, home, bank account etc.) With an LLC they can only go after your business assets unless there is fraud.
If you get sued as a sole proprietor they can go after your personal assets (car, home, bank account etc.) With an LLC they can only go after your business assets unless there is fraud.
An LLC can make sense for somebody providing a service where the work they perform or product they provide can put them at risk if they make a mistake or have a bad outcome from their work. I wouldn't want to manufacture personal care products, for example, without an LLC umbrella to protect and insure my operations ... although many people do.
Still, it's a relatively minor hurdle for a competent attorney to overcome if the services or product provided cause physical damage to a client, especially if there's a medical condition or outcome. I've seen successful lawsuits penetrate the LLC cover against everything from small production personal care products (shampoo, lotions, hand creme, soap) that caused allergic reactions (or so they claimed) to a horse riding instructor that had a student/apprentice have a wreck on the student's own horse in a recreational ride (not a training ride) and be held liable for the student's death.
You need to assess the difference in what the exposure is that you're trying to protect yourself against. A manufacturer's rep who is simply calling on clients to represent the products and take orders for that product made by others isn't at much risk for causing damage to their clients.
You can tell the risk level by comparing the types of businesses here from an insurance underwriting standpoint. For examples:
1) my automotive repair business, where I could make an error or ommission which causes an accident to a client with potential medical consequences, loss of income, etc ... has a fairly high insurance rate for GKLL and LL coverage, along with a couple mil additional umbrella policy ... in the thousands of dollars per year for a low 6-figure per year gross sales operation. That includes labor and parts sales.
2) my manufacturer's rep business, where I might sell a client the wrong product for their application (which can have outages or downtime consequences) ... costs me $600 per year for multi-million dollar coverage on gross sales approaching 7 figures. If a client isn't happy with a product, most times the manufacturer will replace it or exchange it at their expense to satisfy the customer ... or in an extreme case, refund the product. I've only had that happen once in over 20 years.
I don't know where you get the idea that the corporate umbrella is so hard to pierce for a small business operation. To begin with, if it's really a small outfit ... such as the OP's one person operation ... just about every business arrangement they enter into will require a personal guarantee for payment. So the folk the OP might need to owe money to on an open account will already have gone around the LLC as a condition of doing business. Again, an example: My automotive shop has open accounts with a dozen wholesale suppliers that I commonly do business with; each requires a personal guaranty as part of my account application before they will sell product to me on account. If I don't have the personal guaranty on file, they require COD or even payment in full in advance of shipping the product.
From the client standpoint, a independent rep is not the one who is collecting the money for the product, in this case ... wines. The rep is a rep, not a stocking distributor reselling product from inventory. The monies go from the clients to the producer, and the rep gets a commission after the sale. The point here is that an independent rep is merely a sales rep ... and independent from the sourcing, production, packaging, or creation of the product itself. The manufacturer/producer is the one who bears the liability for the product, not the rep.
You folks that deride using a CPA to make business decisions miss the point: while they cannot render legal advice in the pure sense, they can sure give you the insight into what is actual best or prudent practice for a business. If my CPA has any reservations about crossing the line from accounting practice judgement to a purely legal concern, he's the first to tell me to run his opinion by my lawyer. It's pretty rare that he is compelled to do so; an analysis of the costs vs benefit of an LLC for a given business operation isn't legal advice. If I took the question of "LLC or sole proprietor" to my lawyer first, he'd be telling me all about the legal aspects of the two (at several hundred dollars per hour) and then advising me to consult my CPA for his opinion as to the financial consequences of each option. I prefer to start the process of this type of inquiry with my CPA, who has a lot of experience in these matters.
Considering that an LLC is a nominal expense to create and file it comes down to what real benefit will accrue as a result to the single independent rep? You need to look at any tax consequences, accounting consequences, and insurance consequences. All said and done, even a nominal expense to set it up may not be justified. The bottom line is you need to consult with your CPA, insurance agent, and lawyer before making a decision for your specific situation with all the facts in hand. Don't forget to ask your insurance agent about your automotive insurance, too ....
Right - perhaps I used the wrong word. By "prestige" I meant to ask if it gives the impression to potential customers that they are dealing with someone who is more professional than a sole prop. If not, then the single, only reason to go LLC is for indemnity. What do you say?
All business structures in the US can be owned and operated by a single person, so no business structures give that sort of "prestige".
Regardless, no, that isn't the only reason you'd want to be a LLC. Usually liability protection is the primary reason, but its by no means the only benefit. For example, you can change the ownership (full or partial) of an LLC where as the same can't be done with a sole prop. As a result you can't really sell a sole prop since a sole prop is attached to the individual, instead you have to sell the underlying assets and the buyer has to start a new business utilizing those assets. Where as an LLC can be sold as an continued operation since its a separate entity. Similarly, you can sale any fraction of your LLC to investors, partners without restructuring anything, where as a sole prop would have to convert into a partnership, etc to achieve this.
Unless you can't form a LLC (there are some restrictions), there is no good reason to operate as a sole prop. I think most people do it out of ignorance, or because their business was started organically as a hobby and was therefore pushed into that entity automatically.
But even if one finds themselves with a sole prop, doing a tax-free conversion into a LLC is pretty trivial. At least legally, tax, etc wise.
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