We are starting a small bed and breakfast in KY. LLC vs sole proprietorship. Which would be the most advantageous?
Whether to incorporate (forming an LLC or an S Corp) is a question only you can answer. It is a tradeoff between (1) limiting your personal liability to the amount you invest in the LLC, and (2) paying to form the LLC and the taxes and fees payable by the LLC. (Consult a local lawyer as to his fees, state filing fees and taxes.) If risk is your main concern, the LLC is more advantageous; if costs, then a sole proprietorship or a partnership.
How risky do you think this business is? Incorporation protects your personal assets from creditors of the entity (i.e., the LLC or the corporation) but the entity remains liable for such debts. Your first consideration should be to consult a good liability insurance agent to get coverage against claims of negligence and an auto insurance policy with substantial limits, $1,000,000 or more. An “umbrella” insurance policy with excess limits of $2,000,000 is not too expensive and may not be overkill, particularly if you have significant assets to protect. Consider the amount of risk vs. the potential loss. A businessperson’s skills should include a keen eye for value and the ability to assess the amount of risk realistically. How likely is it that a guest will be injured? Slip and fall? Bad food? Attacked in the parking lot? Most of these injuries are covered by insurance. Initially your activities sound relatively low-risk, but not risk free, so corporate protection may not be necessary. You need to make that assessment as part of your decision on incorporation. It will not help with liability for a loan at the bank since you will have to guarantee the loan personally. If you finance with credit cards, the entity would help, but be sure the CC is issued to the entity, not to you personally.
DISCLAIMER—This answer is for informational purposes only under the AVVO system, its terms and conditions. It discusses general legal principles, trends, and considerations and is not intended as specific legal advice regarding your question. Each state has different laws and the answer could be different if all the facts were known. Full evaluation of your legal situation would require personal consultation permitting an understanding of all the facts and circumstances This answer does not establish an attorney client relationship.
(Bryant) Keith Martin
I would strongly recommend from a liability perspective that anyone operating a bed and breakfast in any state operate the business under a separate legal entity such as an LLC or a corporation. If someone were to get seriously injured at your B & B, and you are a sole proprietorship, your personal assets are at risk in any claim brought against you. Even if you have insurance, the claim may be for greater than the insurance or the insurance company may deny the claim for some reason. This is not a risk that is worth taking, in my opinion. You should consult with a local attorney in your area who can assist you in determining the best entity for your business from both a liability and tax perspective. In addition, you may want to consult with a good business accountant to help with that decision too.
This response is not intended to provide legal advice or to establish an attorney/client relationship.
I never recommend running a business as a sole proprietorship or partnership. It opens up your personal assets to business creditors. Whether you use an LLC, an S-Corporation or a C-Corporation depends on your tax situation. Talk to a tax specialist before you decide.
[This communication is intended as general information and not specific legal advice, and this communication does not create an attorney-client relationship.]