When Darin Edmonds started Waterproofing Solutions, Inc. earlier this year he knew making a go of it wouldn’t be easy in a struggling economy. But he was determined to get things off on the right foot, and to him part of doing that was putting a wall between his personal and business assets by setting up a Subchapter S Corporation.
“When I began in this business 21 years ago it was okay for me to start out as a sole proprietor. At this stage in my life, when I have personal assets to protect, that’s no longer a sensible option,” says the 46-year-old Corona, California, contractor.
Whether they are running a small side business, investing in real estate, or are established professional service or trade professionals like Edmonds, go-it-alone, self-employed individuals typically start out as sole proprietors because it’s easy and relatively uncomplicated. Under a sole proprietorship -- or general partnership if there is more than one owner --a business can get started simply by hanging out a shingle.
By contrast, while separate business entities such as limited liability companies or Subchapter S Corporations can shield personal assets and offer potential tax benefits, they also come with more paperwork and cost. Edmonds paid nearly $3,000 to have a legal professional set up his corporation and file the appropriate paperwork with the state, and will need to pay state annual fees as well. His accounting costs are also likely to be higher. “The peace of mind is well worth it,” he says.
Not everyone needs to form a separate business entity, says Johanna Sweaney Salt, a certified public accountant and partner at Kaufman Schmid Gray & Salt in Claremont, California. “There isn’t a lot of trouble a portrait photographer can get into, and there is always professional liability or umbrella coverage as a backup,” says Sweaney Salt, who nonetheless cautions that people should consult an attorney on such issues. “A lot of business owners complicate things when they really don’t have to.”