Choosing a structure for your handyman business is an important step while setting up your business. Your decision will effect the amount of taxes you pay, your personal liability, your ability to borrow money, and the amount of paperwork and record keeping required. By making the right choice, you can save money on taxes and accounting, and even protect your personal assets in the event your business was to get sued or fell heavily into debt.
There are several different structures to choose from:
- Sole Proprietorships
- S Corporations
- Limited Liability Companies (LLCs)
Only two of these structures will make sense for most new handymen businesses; sole proprietorships and LLCs. I’ll describe the advantages and disadvantages of each in this post. But it will ultimately be up to you to choose the right structure for your unique situation.
Also, please note that I am not an attorney or accountant and this should not be taken as legal advice. The information provided is simply a product of my personal experiences and opinion and should not be considered all inclusive by any means.
Just had to get that out there.
Let’s continue and start with the first common option.
This is the most common business structure according to irs.gov. It’s easy to set up and provides you with complete control over your business. Many handyman, consultants, and other small businesses choose this structure for it’s simplicity.
Owners of a sole proprietorship are responsible for taxes on the net business income which is taxed at individual rates on their personal tax returns. This is referred to as pass through taxation because all of the business income simply passes onto the owners tax return and is added to other income the owner may have. Owners are also responsible for self employment taxes for social security and medicare.
In a sole proprietorship the owner is generally liable for all debts and financial obligations of the business. This essentially means that your business is looked at as an extension of your person by the IRS and the law. If the business is in debt, the owner is in debt. If the business gets sued, the owner is essentially getting sued. Unlike a corporation, a sole proprietorship is NOT a separate entity.
- It’s easy to setup. Often times it can be as easy as simply setting up a bank account. You don’t even need to register for an EIN (employer identification number) unless you have employees. However, you must obtain the required licensing for your city, state, or federal government in order to legally operate.
- There is no state registration required unless you plan on using a fictitious name (any name other than your own) to operate under.
- If you work from home and use your own name for the business, you may have no startup costs at all.
- Much less paperwork and record keeping when compared to a corporation.
- Tax preparation is very straightforward and less costly when outsourced.
- Since a sole proprietorship is not a separate entity, the owner is responsible for all debts and financial obligations incurred by the business. The structure provides no legal protection for the owner’s assets. (That’s a pretty big disadvantage)
Limited Liability Company (LLC)
LLC’s are gaining popularity as they provide business owners with some benefits of both a corporation and a sole proprietorship without a ton of paperwork and records to deal with.
Similar to a corporation, an LLC provides a financial and legal barrier for the personal assets of its members. A business owner who files under an LLC has basic liability protection from having his or her personal assets seized for debts or obligations of the business. In addition to providing protection to personal assets, an LLC also works the other way around. It prevents the assets of the business from being seized from personal creditors trying to settle a personal debt. A creditor can only go after the portion of the profits that the partner who was indebted has allocated to him or her. Put simply, an LLC protects you from your business’s and partner’s debts and financial obligations.
The tax structure of an LLC is very similar to a sole proprietorship or a partnership. The earnings pass through to the individual members (owners). The members are then responsible for income tax and self-employment taxes.
- Member’s personal assets are protected from business debts and financial obligations.
- Not subject to corporate tax or double taxation. Tax functions similar to a sole proprietorship.
- Limited paperwork and record keeping when compared to a corporation.
- Fairly simple to set up.
- More expensive to maintain than a sole proprietorship or partnership (usually a few hundred dollars per year).
- Slightly more work to setup than a sole proprietorship.
NOTE: Avoid Forming a Single Member LLC
From what I understand, this is something you want to avoid because in order to gain the legal and financial protection that an LLC offers, there must be multiple members. I recommend reading this article on single member LLCs for further clarification.
The easiest way to gain the benefits an LLC has to offer is to give a 2% share to one of your close family members (sorry, your spouse doesn’t count). You then setup the LLC to be member managed and chose yourself as the sole manager. This prevents your family member from having any say in day to day operations while providing you with the extra security of an LLC.
However, in certain states you can form a single member LLC and still get the financial protection that typically comes with a multiple member LLC. Again, the article mentioned above is a good reference.
Which Structure is Right for You?
There isn’t one business structure that fits all handyman businesses so there are several things you should consider while making your choice. I strongly recommend that you speak to both an accountant and an attorney before making your decision. Every state has slightly different laws pertaining to business structures.
I structured my handyman business as and LLC. This was the best choice for me because I wanted to extra liability protection while still having the tax benefits of a sole proprietorship. It wasn’t very difficult to setup either. I simply went to the secretary of state’s website and filled out some online forms. $400 dollars later and I was the proud owner of an LLC.
Another cool benefit of an LLC is that people see the LLC on the end of your name and it makes you sound more official. Most people don’t really understand the full meaning or how easy one is to create so they automatically think your business is big time. Little do they know that pretty much any US resident can file for an LLC and have one in five minutes.
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