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business organization - LLC vs PLLC vs S-corp vs PC

Jun 30 '14 24 Last Comment
gruen
Jun 30, 14 12:50 pm

OK, so I'm looking at taking the step to move from being a sole proprietor to some sort of business entity that has a bit more liability protection (yes, I know I can always be sued personally as a professional). 

I practice (and am licensed) in several states. I also sometimes do residential projects in yet other states where I am not licensed. 

Currently, this is easy. Only my home state requires I register my business entity as a sole proprietor. The other states just allow me to do business. I do not have a DBA as I practice under my own name. 

Can any firm owner (who has gone through this) give me advice as to organizational structure? 

My thoughts:

1) I'd prefer lower taxes (S-Corp?)

2) I'd prefer simpler operating and record keeping organiaztion (LLC/PLLC?)

3) I'd prefer more liability protection (don't know which one is better)

4) Do I need to incorporate/LLC in each state I practice in? 

5) I am the only owner. I plan on keeping only one owner. However, I would like the option of adding other owners in the future - either licensed or unlicensed. I don't know what types of entities would allow me to add unlicensed owners, if any or at what percentages. 

I know I won't get everything off my wishlist, but any guidance is much appreciated. 

 

Donna SinkDonna Sink
Jun 30, 14 1:16 pm

My accountant in Indiana told me an S-corp was better for me - sole prop with no employees.

Gregory WalkerGregory Walker
Jun 30, 14 1:16 pm

gruen, 

 

my experience is: 

1 - s-corp is better than c-corp in terms of taxes. s-corp does require more paperwork as you actually own shares of the company. an llc technically has 'members', whose operating agreement splits the % of ownership. shares are, imho, much easier to transfer between partners/owners/employees/etc. so, if you're the sole owner for some time to come, this may not be an issue. 

2 - not all states have an llc/llp offering. if they do, like mine, you can choose to be taxed as an s-corp or partnership for federal purposes. neither tax filing would affect your liability. but those are very different tax categories. 

3 - at least as i've been advised, there's no real difference in liability protection between s-corp or llc. at least for my state. both protect personal assets way more than a partnership. 

4 - it will depend. most states now require a separate incorporation in the state, with a "physical address" there as well. usually, that cannot be a PO Box. 

5 - you'll have to look at the sec. of state's page for your state to see what % of ownership can be non-licensed (as a professional corporation). it could vary between types (s-corp or llc/llp). 

gruen
Jun 30, 14 1:31 pm

Thanks Greg & Donna.

It looks like I might be able to file "foreign entity" docs w/each state I do business in (other than my home state). Sounds like a pain in the a$$. I will probably do this anyway because the pain is outweighed by the liability protection. 

Anyone have any insight on being a Professional Corporation (PC) or Professional Limited Liability Corp (PLLC) vs straight corp or LLC?

Donna SinkDonna Sink
Jun 30, 14 1:59 pm

I don't have helpful insight, but I do recall being told that because my state is a personal liability state, registered professionals operating within a corporation are *not* shielded from liability as individuals.  However, property held in common with someone else - like a spouse - cannot be the target of a personal liability lawsuit. At least that's how I understand it.

gruen
Jun 30, 14 2:08 pm

Donna, I think that's typical (same way I've heard it). And the reason I'm working to do this ...

Gregory WalkerGregory Walker
Jun 30, 14 2:27 pm

gruen - we don't have PC or PLLC as an option here. only LLC. 

 

some states we do have to register as a foreign entity (or foreign corporation). but, honestly, that's been easier to do than having to file as a distinct LLC. waaaay more easy. 

gruen
Jun 30, 14 3:36 pm

Thanks Greg. I think I'm getting a handle on it. My CPA is pushing a S-corp for tax reasons, but I wonder if it's way too complex for an office of one. LLC seems to make more sense to me (simpler to run?) but I have no idea about the tax implications. 

quizzical
Jun 30, 14 4:50 pm

When choosing a form of legal organization for small businesses, tax considerations are not really as important to that decision as we generally suppose. Liability protection should be your primary concern.

In day-to-day practice, a design firm operating as a C-corp typically does not pay any corporate income tax for the simple reason that, at year end, all otherwise "taxable profits" are distributed to employees and owners as "bonuses" in order to avoid that second level of taxation. Those bonuses are then taxed at personal income tax rates, more or less in the same manner that S-corp, LLP or partnership income is taxed.

I practiced in a C-corp for more than 30 years. In all of that time, we never, ever, paid any meaningful corporate income taxes and we always operated strictly according to IRS regulations.

I suggest that you don't let yourself get overly wrapped up in the tax implications associated with various forms of legal organization. Keep it simple -- the tax man will get to you no matter what you choose, and you will manage your finances (and those of the business) to keep the tax bite as small as possible.

tint
Jun 30, 14 5:52 pm

I am not an architect but am I an owner in an S-Corp with 2 owners plus 2 employees. I can't comment on liability but we pay significantly less taxes as an s-Corp. The extra paperwork isn't bad, but we have an accountant. 

mightyaa
Jun 30, 14 6:33 pm

We were a PC but reincorporated as a S-Corp...   I think the PC had the protections of a S-Corp, but with the added benefit that you had to have the majority stockholders as licensed professionals.  We had to change as it passed from my Dad to my sister and I.  She isn't licensed and runs the business side, hence my lack of clear answers. 

Considering my Dad's old partner was somewhat of a philanderer, I'm guessing the PC aspect is how the assets were protected from his numerous divorces to protect the firm from 'hostilities' and ending up with a board full of torqued ex-wives.

BulgarBlogger
Jul 3, 14 9:20 am

Not that this should be the reason you should register a company one way or another, but I know that in NY, not only do you have to conform to the NCARB rules for IDP, but NY has its own requirements under what entity the experience you submit will count toward the licensing process. For example, if you work at a PLLC, the experience will count, whereas if you work at an LLC it will will not. Depending on what state you are practicing in, and if you want to attract candidates who are seeking licensing in a state with similar requirements, this may become an issue. I knew someone who thought he was done with his entire IDP only to discover that none of it counted (or very little of it did) toward licensure because his company was registered as an LLC. Just a thought...

Donna SinkDonna Sink
Jul 3, 14 10:18 am

WHAT?!?! Bulgar, for real?! That's insane!

Joseph WassellJoseph Wassell
Jul 3, 14 12:49 pm

Bulgar speaks the truth.. According to NYS Office of the Professions:

"General Business Corporations, Limited Liability Companies, Professional Associations (PA), and Limited Companies (LTD) are not permitted to offer architectural services in New York."

A PLLC on the other hand is considered a "permissible form of business" in New York.

So if one of the states you practice in is NY, you may want to exclude LLC as an option

jla-x
Jul 3, 14 1:07 pm

That's completely insane.  

Gregory WalkerGregory Walker
Jul 5, 14 10:51 am

just seeing bulgar's post - why is that insane? they just have a more refined LLC option up there. from what joseph posted, it seems like the business itself should have known when they set up that architectural services were not allowed under a straight LLC. or they're willingly misleading the public. or something in-between. 

 

i do feel for the person thinking they're getting IDP credit but did they not have a licensed architect signing off on their work? i would think they could appeal to NCARB is so. if they didn't... then i don't know what to tell them. that's a pretty basic requirement.

gruen
Jul 6, 14 12:46 pm

Wow, that is nuts. I do practice in NY. Also in my state I have to be a PC, there is no PLLC in my state. Problem "solved" :/

ben.loeffler
Oct 6, 14 5:31 pm

Just chiming in on the NYC LLC situation. I just talked to the state board today and they can't count 16 months of work experience towards my license because that time was spent at an LLC. No one in the state of New York is going to stop you from registering your architecture office as an LLC but just know that you will not be able to "lawfully" deliver architectural services.

Ouch!

Alternative
Oct 6, 14 5:53 pm

TALK TO A LAWYER.

gwharton
Oct 7, 14 1:04 pm

LOL New York. Yet another reason not to have anything to do with the place.

BulgarBlogger
Oct 7, 14 1:41 pm

LOL

Why in the world would anyone be a sole proprietor? that is like business 101.. it doesn't matter whether or not you are the only employee or have 1000+ employees, and it doesn't matter whether it's a bigger pain in the ass to do taxes or not... ultimately you can hide behind the corporation should something happen...

gruen
Oct 7, 14 3:51 pm

I'm officially a PC now. Bulgar, I agree, should have done it to begin with.

Jaime RobertsJaime Roberts
Oct 7, 14 5:53 pm

3) I'd prefer more liability protection (don't know which one is better)

4) Do I need to incorporate/LLC in each state I practice in? 

Each state has very different laws regarding business organization. I'm registered in NY and CA and they have completely different laws. So you need to research each state individually and may need to set up different business organizations for each (esp. NY and CA). 

The best advice I've received is from my professional liability insurance company. They often gave classes on how to incorporate in order to reduce liability. I suggest asking them.

Broadstreetexpresstrain
Oct 7, 14 9:35 pm

Great post.......it's nice to see some other topic discussed besides which color font to use for my portfolio.......

 

i had an s corp but changed over to an LLC which required less paperwork to run ....and for me the tax rates for both were about the same.

 

always check with your state to determine which types of businesses will be allowed to practice architecture and do your own research about the benefits of each......good luck and stray away from sole proprietor joint proprietor practices for liability protection.

Carrera
Oct 7, 14 9:43 pm

I agree tax is really not an issue; you just need protection from the ass-holes. My attorney wisely told me that if you really do something wrong there is no real protection – but – the object is to protect your assets, your wife, and your house….and really anything will do – just do what is cheapest and most simple to manage and mostly today that is LLC.

Now, if someone sues I usually went limp and just let them get a judgment against my LLC and there was never anything they could collect. It happened and I just switched banks across state lines, they never found anything. Everything I owned was in separate corporations or LLC’s - they can only get judgments against the entity they are under contract with. Why spend money on attorney’s defending yourself when you can just divvy up all your stuff into small chunks and let them try to collect – nothing.

I never had professional liability insurance in 40 years of practice, why do that? Just hide everything. In later years as things got big I went off-shore with cash – was scared at first but it was no-sweat. Had a corporation in Belize with its  bank account in the Cayman Islands – NEVER avoided taxes but no one could find anything, ever.

Don’t trouble yourself with this, just do an LLC and let them come at you if that occurs – they can only collect on the LLC and if those assists (cash) is hidden – so what.

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