If you’re starting a sole proprietorship in New Hampshire and hiring an attorney to assist you, here are the six questions to ask your attorney with brief summaries of how your attorney should answer them. Your lawyer will want to expand on these answers. For the sake of clarity, I’ll put the six questions in italics.
1. Does my individual member company need a written company agreement?
Yes. You need a written company agreement to:
■ to protect you from lawsuits by third parties against your LLC,
■ to define the management structure of your LLC,
■ To ensure that you are maximizing your pass-through deduction under Section 199A of the Internal Revenue Code,
■ for estate planning purposes and
■ if a bank, a potential investor or another third party wants to review your company agreement.
2. Do I have to set up a sole proprietorship company to run my business if I don’t have any employees, if I don’t work regularly with independent contractors or other third parties, and if I don’t have to provide personal guarantees for office rentals, equipment purchases or anything else?
Probably not. In the situation you described, you should probably only run your business as a sole proprietorship under New Hampshire state law. This is because any third party who ever sues your company will also sue you on your own behalf as well as on behalf of your company, and LLC legal liability cover will not help you.
While you don’t need to file a New Hampshire incorporation document to set up a sole proprietorship under New Hampshire law, you should give a third party power of attorney to administer your LLC in case it is due to illness or otherwise you cannot manage it yourself . You should also state in writing what will happen to your business assets if you die while running your sole proprietorship and you do not have an estate plan to address these issues. And you should file this letter where it will be found by a family member or friend after your death. Finally, like any other type of business organization, your state-owned sole proprietorship should have adequate public liability insurance.
3. If I were to run my sole proprietorship as a legal liability company rather than a state sole proprietorship, should that company be a sole proprietorship rather than a sole proprietorship?
Your company should be a sole proprietorship. For both legal and tax reasons, a sole proprietorship company is much more flexible and easier to set up than a sole proprietorship company.
4. Assuming I run my business as a sole proprietorship, what should the federal tax structure of my LLC be?
This is about the 20% federal tax deduction that may be available to you under Section 199A (see above) for your business income from your sole proprietorship. This structure will likely depend on your individual taxable income in the year of incorporation of your LLC if you are single and your joint taxable income if you are married. You should likely be subject to federal income tax on your own behalf as a sole proprietorship if you are single and your taxable income is $ 164,925 or less. and if you are married if your combined taxable income is $ 329,800 or less. Otherwise, your single member LLC should likely choose to be an S corporation.
5. Is there a reason I should run my business as a two-member LLC rather than a one-member LLC?
Yes, there are at least three possible reasons and you should discuss all of these reasons with your lawyer.
■ If your business is a two-person LLC (such as a husband-wife LLC), you may be eligible under an IRS proposed regulation called Prop. Reg. Section 1.1402 (a) -2 (the cannot be used by single member LLCs).
Second, if you are doing business as a two-person LLC, you likely have better protection against veil piercing. (Veil piercing is a legal doctrine that makes you personally liable for your LLC’s debts. Veil piercing is a dangerous event for multi-member LLCs, but especially one-member LLCs.)
Third, an LLC of two people can give you reasons for estate planning.
6. Is there a reason I should start more than one unit to run my new business?
Yes. If your company has valuable business assets at the start of your business or relatively soon after, you should create two new entities – a holding company and an operating company. The holding company holds your business assets and leases them to your operating company. The operating company will use these assets to run your business but will not do business with third parties. This holding company / operating company structure protects your business assets from third party lawsuits as any lawsuit against your business is directed against your operating company – which has no assets.
However, don’t rely solely on this column for answers to the six questions above. Ask your lawyer.
John Cunningham is an attorney from McLord Middleton, PA, Concord, NH. His practice focuses on LLC formation, general business and tax law, advising clients under IRC Section 199A, and estate planning. His phone number is (603) 856-7172, his email address is law[email protected], and the link to his website is www.llc199A.com.