Changing a Sole Proprietor business into an LLC and asset treatment.

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Workinprogress
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Changing a Sole Proprietor business into an LLC and asset treatment.

Post by Workinprogress »

I am trying to set up a new business.
I applied for and received a Washington State Business License as a Sole Proprietor.
The Sole Prop. used my SSN, as I do not have an IRS EIN.
I established the SAM account under the Sole Prop, and am hesitant to muddy the waters by adding an LLC with all of the regulatory agencies with a tight timeline.
I have yet to establish a checking account for the business.
I have since gotten counsel that indicates I should have an LLC instead.
I have not purchased any assets for the business yet, but will before year end.
Between now and 01FEB23 there will be substantial (for me) asset purchases.
Bidding for the VIPR contract that this business will target, will open/close in FEB23, so time is tight.
These asset procurement funds will come out of my pocket, as the business has no money yet.

Is there a link to some sort of "follow these steps" website, or some other resource?

The very earliest to assume any liability or receive revenue is July23. Could I restructure the business after the contract is bid in February and before actually working in July?

How do I purchase a titled vehicle today, before the LLC is alive, and have the LLC own it in the end?
Can I use the sole prop business to hold ownership and lease the vehicle to the LLC. Or does that pierce the veil?
Maybe I need to purchase it in my name today, paying sales tax, and then when the LLC comes alive, sell it to the LLC and pay sales tax again.

I have many more questions but will see if I can nail this portion down first.

I have the Time, Talent, and Resources to do the job, but I am new to small business financial considerations and especially Federal Government contracting.
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MP123
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Re: Changing a Sole Proprietor business into an LLC and asset treatment.

Post by MP123 »

Workinprogress wrote: Mon Nov 21, 2022 11:42 pm How do I purchase a titled vehicle today, before the LLC is alive, and have the LLC own it in the end?
The vehicle would likely be a capital contribution to the LLC when you start it.
Workinprogress wrote: Mon Nov 21, 2022 11:42 pm Can I use the sole prop business to hold ownership and lease the vehicle to the LLC. Or does that pierce the veil?
I'm not sure of the nature of your business, but generally there isn't much of a "veil" for a single member LLC. In any case leasing the vehicle back to yourself (LLC) seems unnecessarily complex.
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cowdogman
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Re: Changing a Sole Proprietor business into an LLC and asset treatment.

Post by cowdogman »

What type of business?

Any employees?
hotwired
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Re: Changing a Sole Proprietor business into an LLC and asset treatment.

Post by hotwired »

I think you should speak to an accountant of course, but here's my two cents as someone who's owned a landscape company that started as a SP, then became an S-CORP, then finally back to an LLC. I have 3 other LLCs (one that OWNS our rental units, one that manages them, so that I can create "employment income", and one that I use for my small web design business).

An LLC is what is called a "disregarded entity" for tax purposes which means basically, the income runs thru to whatever tax return matches how you want to be taxed. LLCs can be taxed AS sole props, SCORPs, or C-Corps (I think). But that's the TAX situation....you're talking more about owning assets.

So I bought my Tundra, but registered it in my landscape company's name, and it paid all the expenses. Then when I closed that company, I registered it in my real estate company's name. I own it, but use it 100% in my business, so the business pays. I don't "reimburse myself" or "lease it" to the business or add any complexity to it. Nor is that necessary, at least according to my accountant (One of the most sought after in my city).

I won't say much more because I'm not really qualified to say what I've said so far, haha! But honestly, it's much simpler than I think you think.
hotwired
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Re: Changing a Sole Proprietor business into an LLC and asset treatment.

Post by hotwired »

***Oh, the contribution of capital, at least "officially" I think will only come into play if you elect S-CORP taxation
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Workinprogress
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Re: Changing a Sole Proprietor business into an LLC and asset treatment.

Post by Workinprogress »

cowdogman wrote: Tue Nov 22, 2022 12:38 pm What type of business?

Any employees?
What type of business?
I live in Washington where there are wildland fires every year. The Forest Service hires contractors to form the fire suppression force. One of the services needed, and scarce in our area, is a Mechanic with a Service truck. These contractors are called up from the VIPR list. The VIPR list is made up of contractors who have jumped through a bunch of hoops and submitted a bid for their services. This bid for services only opens once every three years.

I have been involved with the fire suppression effort in other roles for three years now and I enjoy it. I have earned my living for 47 years as a Heavy Equipment Mechanic. I am ready to retire from full-time work now. However, the things that are required of this position are the things that I enjoy about the job, and I feel I can still be a valuable team member. This is a fun job that I can do for a maximum of 3.5 months a year and earn way more than I do all year long currently. I would likely target more like six weeks, so it stays fun.

Any employees?
Not currently planning for any employees.
However, in the future, there is a possibility of subletting the truck out to another person with their own business license or maybe 1099ing a license holder as a sub-contractor. But that is at least three years away if ever at all.
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cowdogman
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Re: Changing a Sole Proprietor business into an LLC and asset treatment.

Post by cowdogman »

Workinprogress wrote: Tue Nov 22, 2022 3:00 pm
cowdogman wrote: Tue Nov 22, 2022 12:38 pm What type of business?

Any employees?
What type of business?
I live in Washington where there are wildland fires every year. The Forest Service hires contractors to form the fire suppression force. One of the services needed, and scarce in our area, is a Mechanic with a Service truck. These contractors are called up from the VIPR list. The VIPR list is made up of contractors who have jumped through a bunch of hoops and submitted a bid for their services. This bid for services only opens once every three years.

I have been involved with the fire suppression effort in other roles for three years now and I enjoy it. I have earned my living for 47 years as a Heavy Equipment Mechanic. I am ready to retire from full-time work now. However, the things that are required of this position are the things that I enjoy about the job, and I feel I can still be a valuable team member. This is a fun job that I can do for a maximum of 3.5 months a year and earn way more than I do all year long currently. I would likely target more like six weeks, so it stays fun.

Any employees?
Not currently planning for any employees.
However, in the future, there is a possibility of subletting the truck out to another person with their own business license or maybe 1099ing a license holder as a sub-contractor. But that is at least three years away if ever at all.
I'm in WA state too. Sounds like a cool business.

The primary purpose of an LLC to insulate the owner from liability arising in connection with the business (e.g., business vehicle hits a pedestrian while doing a business delivery)--both contractual and non-contractual. But if the LLC has no employees and the owner performs all the duties, then the LLC really doesn't insulate the owner from non-contractual liabilities.

It may be that the bid process you describe requires an LLC. If that is the case, then that's what you need to do.

You do need an accountant to advise you on such things as start up costs (whether you can expense them this year or be required to amortize them over time), how to expense your investment in the Tundra (rather than taking depreciation over time), how to hold title to business equipment, etc. These issues will have a material impact on your taxes and so you want to get them right from the beginning.
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Workinprogress
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Re: Changing a Sole Proprietor business into an LLC and asset treatment.

Post by Workinprogress »

hotwired wrote: Tue Nov 22, 2022 12:54 pm I think you should speak to an accountant of course, but here's my two cents as someone who's owned a landscape company that started as a SP, then became an S-CORP, then finally back to an LLC. I have 3 other LLCs (one that OWNS our rental units, one that manages them, so that I can create "employment income", and one that I use for my small web design business).

An LLC is what is called a "disregarded entity" for tax purposes which means basically, the income runs thru to whatever tax return matches how you want to be taxed. LLCs can be taxed AS sole props, SCORPs, or C-Corps (I think). But that's the TAX situation....you're talking more about owning assets.

So I bought my Tundra, but registered it in my landscape company's name, and it paid all the expenses. Then when I closed that company, I registered it in my real estate company's name. I own it, but use it 100% in my business, so the business pays. I don't "reimburse myself" or "lease it" to the business or add any complexity to it. Nor is that necessary, at least according to my accountant (One of the most sought after in my city).

I won't say much more because I'm not really qualified to say what I've said so far, haha! But honestly, it's much simpler than I think you think.
"disregarded entity" is a new term for me. Thank you for bringing it up, I will go learn what it is.

This truck and the tools on it will be 100% business use as well. Not like you are taking a 17,000 pound truck loaded with valuable tools to the grocery store. :shock:

I will call the DMV on Monday and see what they say about transferring title from me to my LLC.

Thank you for going out on a limb and sharing your experiences, It gives me someplace to start looking for answers.
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Workinprogress
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Re: Changing a Sole Proprietor business into an LLC and asset treatment.

Post by Workinprogress »

cowdogman wrote: Tue Nov 22, 2022 3:13 pm

The primary purpose of an LLC to insulate the owner from liability arising in connection with the business (e.g., business vehicle hits a pedestrian while doing a business delivery)--both contractual and non-contractual. But if the LLC has no employees and the owner performs all the duties, then the LLC really doesn't insulate the owner from non-contractual liabilities.

It may be that the bid process you describe requires an LLC. If that is the case, then that's what you need to do.

You do need an accountant to advise you on such things as start up costs (whether you can expense them this year or be required to amortize them over time), how to expense your investment in the Tundra (rather than taking depreciation over time), how to hold title to business equipment, etc. These issues will have a material impact on your taxes and so you want to get them right from the beginning.
The insulation factor is what I was trying to achieve and why the LLC was suggested to me. I am not concerned about contractual liability, more of the work site issues. Long hours, hazardous work environment, sub-optimal work site, leading to some sort of less-than-perfect repair. There would be some felt pressure to get a tool back on the line even if it took some level of "field ingenuity" that did not work out as planned. The bar for an acceptable repair today is on a whole 'nother level from when I started this game. When the chips are down, it is hard not to go back to a long-abandoned method of repair.

The bid process can definitely be Sole Proprietor. I was just counseled that because I had assets, I should try to insulate/protect them.

I will get with our accountant. I had not even considered him as an asset, as we really only use them for our tax returns. Yes, I know taxes are easily done, but he was part of the package when I married my business owning wife 20 years ago. Some battles are best left unfought.

Thank you for your input.
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Workinprogress
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Re: Changing a Sole Proprietor business into an LLC and asset treatment.

Post by Workinprogress »

MP123 wrote: Tue Nov 22, 2022 11:55 am
Workinprogress wrote: Mon Nov 21, 2022 11:42 pm Can I use the sole prop business to hold ownership and lease the vehicle to the LLC. Or does that pierce the veil?
I'm not sure of the nature of your business, but generally there isn't much of a "veil" for a single member LLC. In any case leasing the vehicle back to yourself (LLC) seems unnecessarily complex.
Thank you for your words of wisdom MP123. Your thoughts are repeated by another member.

It makes me wonder if it is really worth the hassle to restructure if I am not insulating my personal assets by being a single member LLC. Insulation was the whole intent.
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cowdogman
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Re: Changing a Sole Proprietor business into an LLC and asset treatment.

Post by cowdogman »

Workinprogress wrote: Tue Nov 22, 2022 3:34 pm The insulation factor is what I was trying to achieve and why the LLC was suggested to me. I am not concerned about contractual liability, more of the work site issues. Long hours, hazardous work environment, sub-optimal work site, leading to some sort of less-than-perfect repair. There would be some felt pressure to get a tool back on the line even if it took some level of "field ingenuity" that did not work out as planned. The bar for an acceptable repair today is on a whole 'nother level from when I started this game. When the chips are down, it is hard not to go back to a long-abandoned method of repair.

The bid process can definitely be Sole Proprietor. I was just counseled that because I had assets, I should try to insulate/protect them.

I will get with our accountant. I had not even considered him as an asset, as we really only use them for our tax returns. Yes, I know taxes are easily done, but he was part of the package when I married my business owning wife 20 years ago. Some battles are best left unfought.

Thank you for your input.
Then the LLC would not do much for you. If you have employees or contractors and you want to insulate yourself from their mistakes, the LLC will help, but even then you may be sued (individually) for negligent hiring or supervision of the employee or contractor.

The common wisdom is that the best way to protect yourself from business liability is to buy business liability insurance.
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MP123
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Re: Changing a Sole Proprietor business into an LLC and asset treatment.

Post by MP123 »

cowdogman wrote: Tue Nov 22, 2022 3:45 pm Then the LLC would not do much for you. If you have employees or contractors and you want to insulate yourself from their mistakes, the LLC will help, but even then you may be sued (individually) for negligent hiring or supervision of the employee or contractor.

The common wisdom is that the best way to protect yourself from business liability is to buy business liability insurance.
I agree, an LLC probably won't do much to shield you from actions that you yourself do (or don't do). Some of that may be state specific though, so it might be worth talking with a local lawyer. My guess would be that wildland fire suppression might be an area with very significant liability risks, so good insurance would be a must regardless of the business structure, because without it you would need to pay out of pocket to defend yourself or your LLC, either way.
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Re: Changing a Sole Proprietor business into an LLC and asset treatment.

Post by junior »

While the LLC would possibly not offer much protection, it is cheap to form LLCs, so I would expect any lawyer to recommend it since it can reduce liability in some hypothetical situations.
hotwired
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Re: Changing a Sole Proprietor business into an LLC and asset treatment.

Post by hotwired »

Happy Thanksgiving first things first!

I wanted to add some perspective on the "insulation". What my lawyer, and a few other pro's have said is that the LLC is the "LAST LINE OF DEFENSE". Good practices #1, good insurance #2, LLC protection #3. The reason for the "limited" protection of the LLC is that even though you create a separate entity that is NOT you, you may or may not still be liable. For example, your single member LLC is a snow plow company. YOU are the driver. YOU damage a vehicle and cause some medical issues to that driver. He can sue the LLC, but also sue YOU personally. So I suppose another way to say it is, "If someone else working for your LLC did the deed, the damage is limited...if YOU PERSONALLY did the deed, it's unlimited."
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Re: Changing a Sole Proprietor business into an LLC and asset treatment.

Post by HomeStretch »

Workinprogress wrote: Tue Nov 22, 2022 3:16 pm … I will call the DMV on Monday and see what they say about transferring title from me to my LLC. …
Find out from the DMV if the title change will trigger a sales tax payment on your state.

Consider calling your auto insurer as well to see what change needs to be made to the policyholder name and use (personal v. business) if your vehicle title is changed over to your business.

Once you start holding tangible assets in a business name, your town/city may require you to file an annual business property tax return.
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Re: Changing a Sole Proprietor business into an LLC and asset treatment.

Post by Lee_WSP »

Electing a corp taxation is the only real concrete reason to do an LLC when it’s just you in a service business. Services are errors and omissions liability, which are personal to the person performing the service. That’s why professional services provide malpractice insurance for their employees.
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