Sole Proprietor VS. LLC: What Business Structure Is Right For Your Bike Shop?

There are a lot of decisions to make when starting a bike shop or other outdoor industry business, and your business structure is one that deserves careful consideration. Because the way you structure your business can have major implications for your taxes, liability, and even your personal assets.

Let’s take a look at some of the most commonly used business structures business owners choose to help you decide how to structure your bike shop.

How to Structure Your Bike Shop: Sole Proprietor vs. LLC

The most common business structure is also the easiest to form: the sole proprietorship. In most cases, a sole proprietorship is an unincorporated business with a single owner. In some instances, a sole proprietorship is owned and operated by a married couple.

As a sole proprietor, there is no distinction between you and your business; you are entitled to all of your business profits, and responsible for all your business debts and liabilities.
 

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Starting Your Sole Proprietor Business

If you own a business, you become a sole proprietor simply by conducting business. In many cases, some sole proprietors (like freelancers, for example) don’t even register their business with any local, state, or federal entities.

However, you may still need to obtain local licenses and permits in order to open your bike shop, even if you don’t need anything additional to form a sole proprietorship.
 

Sole Proprietor Taxes

When it comes to tax time, sole proprietors have it easy. Any income their business earns is reported on their own personal tax return.

The IRS considers sole proprietorships “pass-through” entities because the business profits pass through the company and are taxed as the owner’s personal income. That means any profit your bike shop earns will be reported on your personal tax return as income -- whether you’ve pulled that money out of the bike shop or not.

Tax Tip: If this is your first business, be prepared. The IRS mandates quarterly tax payments for businesses who anticipate owning more than $1,000 over the course of the year. Failure to submit quarterly taxes could lead to penalties and fines. Talk to a tax professional for more information.

The ease of formation and taxation could be reason why more than 70% of small businesses are sole proprietorships. However, there is one major drawback to this commonly used business structure, as well.
 

Sole Proprietor Liabilities

If you’re a sole proprietor, your bike shop’s debts and liabilities are your personal liabilities. If your bike shop is sued, you will be personally responsible.

If a customer comes to your shop and slips on a wet floor, trips over a display, or hurts themselves examining a display bike, you are completely responsible as the sole proprietor of that business.

At best case, you could be liable for the cost of the customer’s injuries and medical care. At worst case, you could find yourself in court facing the high cost of legal fees, settlements, or judgements.

And if the liability from this incident is more than your business has on hand, your personal assets could be at risk. Your home, automobile, retirement and savings are all on the line.
 

Sole Proprietorship Summary

Sole proprietorships are easy to form and easy to tax as “pass-through” entities. However, you will be personally responsible for any and all business liabilities, debts, and losses, as well.
 

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Limited Liability Corporation (LLC)

Many small business owners are structuring their businesses as Limited Liability Corporations, or LLCs. As the name suggests, choosing an LLC for your business structure can limit your personal liabilities for the business actions and debts.

LLCs can be owned by a single individual, or a group of partners. If more than one person will own your bike shop, you can designate specific operating/management roles and even what percentage of interests each person will have in the business.
 

Starting Your LLC

Unlike a sole proprietorship, there are specific steps you must take to form your LLC:

  1. Choose a unique business name ending with “LLC, Limited Liability Company, Limited Company, or L.L.C.” The name of your bike shop cannot be the same as any other business name filed with your state’s LLC office.
  2. Prepare and file articles of organization, also known as certificate of formation or certificate of organization in some states.
  3. Create your LLC operating agreement, which contains rules for the operation and ownership of the business.
  4. In some states, you must publish a notice with a local newspaper of your intent to form your LLC.
  5. Obtain required permits and licenses, such as business licenses and reseller permits.
  6. Retain your status: LLC members (owners) must adhere to certain formalities to keep their LLC status. This can include keeping detailed financial records and recording minutes when making major decisions.
     

How are LLCs Taxed?

Like a sole proprietorship, LLCs can be considered “pass-through” entities. The profits from your bike shop will pass through to the LLC members to be filed on individual tax returns. When you form your operating agreement, you will determine how you want to distribute profits amongst LLC members.
 

Limited Liabilities

The biggest advantage in forming a limited liability business is the protection of personal assets from business debts. LLCs are designed to protect owners (members) from incurring any liability greater than the amount they’ve invested in the business.

As the name implies, the protection of your LLC is limited: it does not mean you are fully shielded from any and all debts or liabilities from your business. The investment that you’ve made into your bike shop is fair game and could be lost if your bike shop is found liable for an injury, accident, or is involved in a costly lawsuit. But the LLC structure is intended to protect your personal assets from the debts of your business.

There are situations in which you could be personally liable for the debts or actions of your business, even if you’ve formed an LLC. If you’ve co-mingled business and personal funds, failed to follow certain formalities, or have been found to commit fraud -- your personal assets could be at risk. The protection of your LLC is limited, not 100% fool-proof.
 

LLC Summary

Structuring your business as a LLC can help protect your personal assets from business debts and liabilities. You get the same pass-through tax benefits of a sole proprietorship, and an LLC is much simpler to run than a corporation. There are specific steps to take to form an LLC, so check with your own state’s LLC office for more information.
 

Liability Protection for Every Business Structure

If you structure your bike shop as a sole proprietor business, you are personally responsible for the debts and liabilities from your business. If you structure your bike shop as a LLC, your personal assets may be protected, but your investments in the business are fair game.

Luckily, you can shore up your defenses no matter which business structure you choose.

Every day that you open for business, you run the risk of an accident or incident in which you (or your business) could be responsible. A customer hurts themselves in your store, or while using one of your rental bikes, for example. Or your employee is driving your car and is involved in an auto accident while picking up some parts.

Your business can protect itself from medical bills, legal fees, settlements, and even judgements with the right insurance in place. Purchasing general liability insurance for your bike shop is an easy way protect yourself against the cost of third-party injuries, property damage, and even medical expenses.

When your shop has the right insurance policies in place, it can protect your assets: whether they’re personal or business. So if you decide to run your bike shop as a sole proprietor, you can rest easy knowing your home, autos, and even personal savings are protected. And if you decide to form an LLC, you have the peace of mind that the investments you’ve made in your business can stay there.

The way you structure your business has a major impact on your bottom line. Be sure to choose the best one for your bike shop, and then reinforce your business with the strong defense of the right bike shop insurance policy, too.
 

 

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