Starting a Very Small Business - Part 2 - Choosing a Business Type

As I mentioned yesterday, I am helping my sister set up a small antique/collectibles business in an antique mall. To avoid looking like a hobby, I encouraged her to set up as a single-member limited liability company (LLC). I am a fan (if that word is appropriate for a legal entity) of LLC's and I prefer them in many cases over corporations, for these reasons:

• They are easy and inexpensive to set up.
  
• They provide protection against legal liability, and
  
• They avoid the double taxation problem of corporations.

She could set up as a sole proprietor. She is the only person in the business (she may hire her daughter as an employee), and there is minimal liability concern (more about that in another post). If she were setting up as a sole proprietor, she would need to file a "fictitious name" (D/B/A) statement with the county, since her business is operating under a different name than her own.

The taxes for a sole proprietorship and a single-member LLC are the same - both are taxed as sole proprietors, with the income from the business passing through to her personal income tax return.

In the end, it probably doesn't matter if she starts as a sole proprietorship or an LLC, but I suggested she use the LLC form because it is more "business-like" and the business is clearly a separate entity. Thus she may be able to avoid the issues related to "hobby loss" rules that I mentioned yesterday.

Tomorrow, liability and insurance issues