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Business Entity?
8

Business Entity?

Business Entity?

(OP)
I just discovered this site and think its fantastic…you all have a wealth of knowledge and experience, and its great to see everyone helping each other out!

I’m planning on starting up a structural engineering firm in a couple of months, primarily preparing structural construction documents for educational, commercial, and residential projects and offering construction administration services.

For those of you who have started up your own firms, what are the advantages and disadvantages of various business entities?  I’m in NY State, which has PSCs (Professional Service Corporations) and PLLCs (Professional Limited Liability Corporations).  I do not really know the fine points of difference between the two, but I know that I want to incorporate to help shield my family’s assets in this litigious environment of structural design.  Does one offer better legal protection?  Does one have accounting benefits over the other?  Can anyone guide me towards some good resources to research this?

I’m going to talk to a lawyer next week about incorporation, but wanted to get some more background first.

Thanks for your help!
-Ryan

RE: Business Entity?

2
Talking to a lawyer is a critical early step.  Getting information prior to that meeting is pretty smart.

One thing that my attorney didn't mention/realize is that no business structure shields a PE from personal liability for things he has stamped.  After that factoid was introduced into the discussion, we decided that since my company was only going to be me it wasn't worth the hassle/extra bookkeeping/filing-fees to make my company anything but a Sole Proprietorship.

I went into it thinking I was going to have an LLC or PLLC, but neither one of them had any real benefits for a one-person engineering company.  If you are going to have staff then the discussion is far more complex and there could very well be excellent reasons to incorporate.  For my situation, they were not compelling.

David Simpson, PE
MuleShoe Engineering
www.muleshoe-eng.com
Please see FAQ731-376 for tips on how to make the best use of Eng-Tips Fora.

The harder I work, the luckier I seem

RE: Business Entity?

Also, one thing many people forget about during startup prep is to spend some time in the local SBA (Small Business Administration) office.  They are a wealth of knowledge and can point you in the right direction.

Dan - Owner
http://www.Hi-TecDesigns.com

RE: Business Entity?

I started my business about 2 years ago (in NY) and went the PLLC route.  David is correct that the business structure you from personal liability for stamped drawings. However, it may (depending upon a variety of circumstances) provide a shield for non-engineering activities you may be performing in your business.

I would speak w/ an account as well; I know mine has helped me and I feel it is money well spent. After all, he can research things much faster than I can while I'm running the business.

The PLLC was relatively inexpensive to start. My lawyer charged $150 plus there were the required filing fees w/ the State; proably about $600 to get it going total (considering the requirements for advertising in (2) papers). There is also a $100 a year fee with the State.

For a single-person entity PLLC the bookkeeping is not really an issue.

NYS Department of State has some great information on their website outlining the requirements of all the different business forms.  http://www.dos.state.ny.us/corp/corpwww.html

Good luck with everything.

Patrick

RE: Business Entity?

I went with an LLC taxed as an S Corp (talk to an accountant) which, even as a single person entity has several benefits over a sole proprietor, but might be state specific in some of the details.  

1.  Bookkeeping is slightly easier with a sole proprietor, not enough to matter, but you do have to deal with payroll taxes in the LLC.
2.  LLC adds a layer of protection from liability because company finances are separate from your personal finances.
3.  You can pay yourself partially in dividends, which lowers your overall tax burden, whereas a sole proprietor pays self-employment tax on everything.

Congratulations and good luck.

RE: Business Entity?

I think an LLC is the way to go if you have partners.  If you are by yourself, almost any incorporation should be fine to ensure protection.

An S-corp is the best way to go from a tax perspective.  A C-corp first pays taxes and then the disbursements to the owners are taxed again.

Don Phillips
http://worthingtonengineering.com

RE: Business Entity?

My wife is my partner in my LLC.  Partners don't have to be "managing" members--meaning they can have a stake in the business without necessarily running it.  There are lots of ways you can structure an LLC, so check into your local state to get the variations available to you (corporation commission or whatever they call it where you are).  Here in AZ, we're able to download the appropriate forms from the corporation commission web site and complete everything relatively easily.

We don't do the double-tax thing--it's not necessary or beneficial for us.  (Although we do us a good CPA, who guided us through the various options that would be beneficial in our case.)  The comments above are excellent.  You'll want to have some sort of business structure in place so you don't end up throwing ~16% of your income away on social security alone (you get hit as the employee and employer--wonder if you'll get a double portion at retirement wink )

I track expenses/income in Excel.  Tried QuickBooks Pro, but couldn't get simple-but-unusual things to work, so ditched it (anyone want to buy the 2003 full version cheap?).  So our finances are fairly simple--track and write off expenses, track and report income.  Give everything to CPA for tax filing and we're all set.

Jeff Mowry
www.industrialdesignhaus.com
Reason trumps all.  And awe transcends reason.

RE: Business Entity?

I also recall that for an LLC, you can't have people running essentially different businesses, e.g, my civil engineering consulting and my husband's telecom consulting business under one umbrella.

RE: Business Entity?

I too tried Quickbooks and found it more complicatged than I needed.  It is good if you a few employees who may enter different types of data into it.  I ended up upgrading Quicken to Quicken Home and Business which works great.  

Don Phillips
http://worthingtonengineering.com

RE: Business Entity?

I would offer two pieces of advice.

1.  A good accountant is worth his weight in gold and can advise you on the best entity type from a money and taxes standpoint.

2.  The SBA is a paperwork pit.  Unless you are specifically going after DBE work, your time is better spent marketing elsewhere.

RE: Business Entity?

My business is located in Ontario, Canada. I have seen a number Professional Engineers in Ontario practice as a sole proprietor.  I would never recommend this for the following reasons in Canada:

1) Coporations offer several tax advantages over sole propriertorships.  In the U.S. there are many different types but tax advantages should be be a key consideration.  In Ontario, other professions such as accounting, lawyers, dentists, doctors could not form corporations and therefore could not take advantages of tax issues.  I recently met a doctor who formed a corporation.  The only reason I can see him doing this is to reduce income taxes.

Cvanoverbeke

2) Corporations have Limited Liabilities.  You cannot run from your Professional Engineering responsibilites if your a P.Eng. in Canada or a P.E. in the U.S. but you can limit your liabilties through the corporation.  For example, my Professional Liability insurance is in the name of my company not me personally.  Obviously, my company cannot obtain without a Professional Engineer on staff but it still limits liabilities.

3) As your company grows and shows some financial strength, the ability to obtain financing improves and you can potentially reduce your personal liabilities in the form of personal guarantees.  This assumes you keep your finances of the company in a position that a bank will like it.  One thing is to keep equity in the company.  I was a banker for 8 years and I would lend money to firms like professional engineering firms.  The only assests a professional firm really has is Accounts Receivables which is your customers.  Also if a key person leaves, I would have concerns since they are probably a key revenue generator.

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