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Legal Structure of Your Engineering Company?

Legal Structure of Your Engineering Company?

Legal Structure of Your Engineering Company?

I am about to start my own structural eng. company and would like some input on what legal structure is best.  It will be just me for a while until I can get a lot of business.  The old company I worked for was a P.A. (Professional Association).  My accountant told me an LLC would probably be the easiest from an accounting standpoint.  What legal structure do you use?  Why?  Thanks for your help.

RE: Legal Structure of Your Engineering Company?

I will be carrying e&o insurance.

RE: Legal Structure of Your Engineering Company?

Start by scrolling down this fora.  About every 25-30 threads someone is asking the same question you're asking.  I know the search in eng-tips.com leaves a lot to be desired, but there are so many threads on business organization that just scrolling will get you a ton of information.


RE: Legal Structure of Your Engineering Company?

You need to check with your Secretary of State and State Board.  Some states require a Professional LLC (PLLC) to practice engineering just like if you were going to practice Law.  In North Carolina, you must first apply to the Engineering Board and they send you an Okay letter that you have to file with the Secretary of State.  

I'm a single man shop PLLC right not.  My accountant advised me to register as an S-Corp with the IRS.  So, I'm still a PLLC but I'm doing taxes as an S-Corp.  

Another guy I know went through the same process and his accoutant told him to remain a LLC with the IRS...So, who knows.

There is not a question as to what is best, do the research, pick one, and run.  There are pros and cons with all structures.

Good Luck.

RE: Legal Structure of Your Engineering Company?

I personally went with a corporation and filed it as an S-corp.  I was looking to create separation of the company from my personal assets.

Don Phillips

RE: Legal Structure of Your Engineering Company?

Good Idea to check local legal customs, but here's my 2 cents worth--expanding the conversation a little.

You can use a DBA to work as an independent contractor; however, many companies now refuse to work with anybody without an LLC or other formal business structure.  The tax effect is the same if you are a one person show.  From the standpoint of the bank, it's better to have a business-like appearance when you go for an extended line of credit.

Be aware that as far as a single person LLC goes, there may not really be a lot of liability protection from business debts.  Check this.  A bank and creditors will probably require personal guarantee of the obligations of the LLC, such a building lease, unless the LLC has other assets.

If you plan to make any product or perform development of products(say, structural beams or a fancy new shear pin)or have any inventory, or even own a building that you want to lease from yourself, then a corporate structure will allow you to retain some earnings in the company at a favorable tax rate for the development of the business and take advantage of some kinds of tax credits for research and development.  In NY state, basically, the business would not pay any state income tax and could qualify for refundable credits, even without making a profit.

If you have any employees other than ICs, a corporate structure will greatly favor some kinds of tax deductible benefits.  This will create extra costs upfront and an extra tax return.  You can convert from an LLC to another corporate form in the future, but you can't go back the other way.

FYI, if you do have a product and you want to secure capital for it, then you definitely need to invest in your legal structure and a good accounting firm.  VCs and sophisticated angels will not want to talk to anybody that is not vetted by professionals.  The LLC form is relatively new and until recently was considered potentially problematic for the purposes of outside investors.   

Don't do anything more complicated than what you need, but do think downstream if you want to develop a business to sell.  For instance a C-corp in Delaware plus R&D unit in Canada and an off-shore holding company is a fabulous structure for maximizing value of a high tech company you want to sell, but... maybe you just need a PO Box and a bank account!

Personally, after have been in engineering services for 20 years, anybody in this selling only labor is a glutton for punishment!

Best wishes, MEF

RE: Legal Structure of Your Engineering Company?

I just went through all of this.  After discussing it with the lawyers we decided it best to go S-Corp.  Corp. laws are very tried and true.  On the otherhand there is a lot of the LLC stuff, according to my lawyer, that is potentially untested to date.

In NJ you can go sole proprieter, which is fine if you are the only one doing the work because all of the fault/liability runs to you no matter what you do.  But you definetly want to go LLC or corp. if you want to use subs as part of your growth strategy.

RE: Legal Structure of Your Engineering Company?

It all depends on what you want the company to do for you.  How many owners are there?  How much risk are you willing to accept?  There are tax implications for all structures - you need to know what they are.  Also there are certain restrictions for all structures, again, you need to know what they are.  Lastly, there are certain things you can do with one structure and not with another.  

I would suggest you do a google search - there are tons of sites out there that offer very good descriptions, pro's/con's on the various business structures available.

Lastly, after you have done your research - find a good CPA or attorney (my use of the word "or" will cause many heartburn, but that's my personal opinion) and discuss it with them.  If they receommend a structure different than what your research indicates, challenge them.  If they have solid reasons for their reccommendation, consider it, if they don't, find someone else.

As a small business owner, being informed is priceless.  You can't know all of the answers, but you should at least be able to ask most of the questions and know if the answers are legitimate.

Greg Lamberson, BS, MBA
Consultant - Upstream Energy
Website: www.oil-gas-consulting.com

RE: Legal Structure of Your Engineering Company?

For a simple one-person firm in the USA (such as mine), I consider an LLC to be the preferred option. By taking the proper steps, there is a high level of separation between personal and business assets and liability.

One nice advantage comes at income tax time: no need for a separate corporate tax return, just a couple of additional forms to file with your personal tax return. You avoid the expense of hiring an tax professional to prepare a corporate return.

See this website for high-quality general info on typical business structures:

www.SlideRuleEra.net idea

RE: Legal Structure of Your Engineering Company?

An sub chapter S corporation is similar to an LLC, in that you file the same 1120S form and a schedule K-1, with a copy to the sharholder(s) so they can file gains or losses with their personal taxes.

Don Phillips

RE: Legal Structure of Your Engineering Company?

As a follow up, I did find:

"Limited Liability Company (LLC)An artificial entity created under and governed by the laws of the jurisdiction in which it was formed. Limited liability companies are generally able to provide the limited personal liability of corporations and the pass-through taxation of partnerships or S Corporations. "


Which allows an LLC to act as a partnership, and as such, you could act as a sole proprietor.  And of course, there are risks:


You still need to look at your state laws as well, especially when looking at liability.

Don Phillips

RE: Legal Structure of Your Engineering Company?

There are at least two types of LLC:

1. "Single Member" LLC which for tax purposes is treated as a sole proprietorship.

2. "Multiple Member" LLC which is treated as a partnership for tax purposes.

I am talking about a "Single Member" format (one, and only one employee - you). This is how I have operated for seven years - filing Schedules C and SE along with my personal income tax return.

I have no doubt that DonPhillips is correct about a "Multiple Member" LLC.

McQSE - Rereading your original post, it sounds like you want for your business to grow larger (more employees than just yourself). If this is the case, you are probably better off following DonPhillips input when discussing this subject with your accountant.


www.SlideRuleEra.net idea

RE: Legal Structure of Your Engineering Company?

I found this information on answers.google:

"Mary owns a print shop. In keeping with the industry standard, Mary decides that a reasonable salary for a print shop manager is $35,000 and pays herself accordingly. Mary’s total earnings for the year are $60,000: $35,000 paid in salary and the remaining $25,000 paid as a distribution from the S corp. Mary’s total employment tax is $5,355 (15.3% of $35,000).

If Mary were the owner of an LLC, she would have to pay employment tax on the entire $60,000, equaling $9,180. But as an S corporation, she realizes savings of $3,825 in employment tax.

One might assume that these savings could be further manipulated by reducing the salary to an extremely low amount and attributing the rest of one’s earnings to distributions—but this would be an incorrect assumption. In practice, the IRS is careful to notice whether a salary
is reasonable by industry standards. If it determines a salary to be unreasonable, the IRS will not hesitate to reclassify distributions as salary.

So, your taxable income results from your salary plus any remaining profit left in the S Corporation after it deducts your salaries and all other available deductions.

'S Corp. vs. LLC: Which Structure is Right for Your Business' by Chrissie Mould, PowerHomeBiz.com"

Don Phillips

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