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Author Topic: LLC vs INC  (Read 1600 times)

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Offline CabinCreations

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LLC vs INC
« on: January 04, 2019, 09:44:29 AM »
Hey guys, 

With future aspirations to begin a small scale portable sawmill operation, I have been doing a lot of research into the local market and business structure. I have spent a lot of time on this forum and have taken in a lot of valuable information.

This question is in regards to business structure - It seems that almost every sawmill company I have come across was formed under an LLC, so instinctively I was assuming I would follow suit to avoid/minimize personal liability. However, I have read that personal protection is not guaranteed for single member LLCs which led me to think that incorporating may be the safer business structure. Yes, by forming a corporation you would be responsible for additional business taxes, but I feel that may be worth it if personal protection is guaranteed. 

I guess I have two general questions then...

1) Why are most sawmill businesses LLCs? 

2) Are there any other options available to assure personal liability protection?

Thanks for any information in advice! 

- Kody

Offline Southside logger

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Re: LLC vs INC
« Reply #1 on: January 04, 2019, 10:19:44 AM »
Tax liability on a Sub S corporation is the same as your personal liability as the proceeds pass through to your personal bottom line.  With a C corp the corporation pays taxes before it distributes money to it's owners so there can be the "double tax" but you have to make a pretty decent profit before that is going to happen. LLC's have "members" not officers or owners and things can get grey there, as I saw happen with a friend.  Personally I have a C corp, gives me 3 years to reduce a profit with loss carry forward and puts me in the same audit category as many big, mulit-national entities, which means my odds of being audited are a lot less in my way of thinking.  
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Offline WV Sawmiller

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Re: LLC vs INC
« Reply #2 on: January 04, 2019, 11:01:31 AM »
   If you are the sole operator of the mill and you cause damage or injury to others then you can still be sued for being personally liable. When I learned that I chose to stick with a sole proprietorship as I am a one man show and did not see where the LLC offered me much protection.
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Offline CabinCreations

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Re: LLC vs INC
« Reply #3 on: January 04, 2019, 11:24:03 AM »
Personally I have a C corp, gives me 3 years to reduce a profit with loss carry forward
Thanks Southside - can you elaborate (or clarify for me) what you mean by this statement?

WV - That is an interesting approach and I have read in other posts that you have gone this direction with your business. So you have decided to move ahead with no personal liability protection then? Do you have any other line of protection like insurance?

Offline BradMarks

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Re: LLC vs INC
« Reply #4 on: January 04, 2019, 11:50:06 AM »
CabinC:  I am no accountant but,.... Southside is referring to the tax laws in place that allow losses in future years to offset gains in previous ones.  It does require an amended tax return for the previous year(s). I too have a C corp, and wages paid to anyone, including officers are a deduction off the top. The double taxation referred to is likely in reference to paying dividends to an officer(from a C corp) at the end of the year, which is after wages/salaries. This is taxed at a different personal rate and is after the business has paid taxes(profits) on the same dividend amount, which would be part of the net income. A bonus(deduction off the top) is different than a dividend, and taxed at the same rate as wages. And yes, in all likelihood an IRS audit is not your friend.

Offline Darrel

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Re: LLC vs INC
« Reply #5 on: January 04, 2019, 01:10:05 PM »
This is something I have not worried too much about in the past but I'm going to need to do something this year just because folks are starting to figure out that I have a mill and most of my neighbor's have trees and no mill. So yes, I'll stay tuned. 
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Offline Southside logger

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Re: LLC vs INC
« Reply #6 on: January 04, 2019, 04:05:09 PM »
It does require an amended tax return for the previous year(s)


Brad - 

I could be wrong but I don't think we have ever had to amend a return due to a carry forward, the return shows the carry forward - be it a loss or profit - and the present years numbers against it, then tax liability when applicable.  

We farm in addition to the lumber side of things and having a 3 year window makes all the world of difference some years.  Bad weather and such you would end up leaving losses on the table as you have nothing left to deduct them against, then when the next year is good you pay more in taxes because you can't claim the losses at that time - double whammy there, especially if you had to borrow money to cover losses.  It also allows for more options of depreciating equipment in good years as a result, which helps us a lot.   
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Offline YellowHammer

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Re: LLC vs INC
« Reply #7 on: January 04, 2019, 11:42:41 PM »
The key to liability insulation is true business separation between the LLC or any Corp, and your personal holdings, property, and equipment.  For example, if people are allowed on your personal property when you mill their logs and they get hurt, then there isnt much separation.  If people only step foot in your deeded business property, then there is separation.  So we deeded out 5 acres from the gate to the mill and showroom as business, so a customer never steps foot on our private property.  If they do, it will be their fault for going into a restricted area without permission.  If they get hurt, they get hurt on business property so there is separation.  

Certainly get an umbrella business policy.  

An S Corp allows you to earn a salary and deduct that.  
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Offline petefrom bearswamp

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Re: LLC vs INC
« Reply #8 on: January 05, 2019, 07:41:44 AM »
You guys are scaring the pants off of me.
I only gross between 10 and 20 gs depending on the year and any legal stuff including business ins would wipe me out.
I only do it to keep from resting out.
I am strongly considering selling the logs I have in stock at a loss, liquidating my inventory again at a loss and either selling the mill or watching it rust away.
I have plenty of woodland to keep me busy without the mill.
Pensions and IRAs allow us to live OK so dont need the minuscule income.
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Offline BradMarks

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Re: LLC vs INC
« Reply #9 on: January 05, 2019, 11:51:04 AM »
Southside:  sounds like yours is a different situation that I was not aware of, and I can understand the need for the 3 yr window.  My experience presently is just a straight up supply company, yr to yr pay the "man".

Offline YellowHammer

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Re: LLC vs INC
« Reply #10 on: January 05, 2019, 10:48:46 PM »
There are lots of people who sawmill work without business insurance.  There are also lots of people who don't have anything to lose.  If you have something to lose and are in business an insurance policy is the only thing that will protect you from potentailly losing everything.  It's not necessarily up to the injured to sue. For example, if somebody gets hurt, even for a random accident, and if there is blood, they will go to the emergency room.  Their insurance will pay the bill, and then ask what and how did you get hurt?  They will be told the injury came while helping, watching, whatever, but being involved, in your sawmill activity.  Their insurance company will then try to contact your insurance company to negotiate a settlement as they don't want to eat the cost of the emergency room visit and any possible follow bills.  So then they find out you don't have insurance, and now they are going to "negotiate" getting the money from you.  I've gotten the little yellow envelope before from the insurance company's lawyers, and it isn't a good day.  The best way to combat this is for your insurance company's army of lawyers to do battle with their insurance company's army of lawyers. 

I'll never forget our insurance policy manager saying "Mr. Milton, that may be your premium you've been paying, but it OUR money they're suing for and they're NOT getting it.  Let us handle this, we have the meanest lawyers in the business." And they did.

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Offline Crossroads

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Re: LLC vs INC
« Reply #11 on: January 06, 2019, 01:25:03 AM »
Pete, you may want to check into an insurance policy. I hate paying for insurance as much as anyone, but its a thousand dollars a year that helps me sleep better at night, knowing that if my mill get stolen,its covered and if I get sued, theres at least a cushion between me and the sewer. And the premium is deductible on your taxes...
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Offline D6c

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Re: LLC vs INC
« Reply #12 on: January 06, 2019, 08:00:52 AM »
I wouldn't try to use the business type to try to insulted yourself from liability, that's more for tax issues.
Use insurance to mitigate exposure to liability.

Offline maple flats

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Re: LLC vs INC
« Reply #13 on: January 06, 2019, 09:24:39 AM »
Have you ever priced liability insurance? It is a cheap one, much less than most other types of ins. Get a quote. I carry 2 million, plus an umbrella at 5 mil. I think both are less than $150/yr. I however have lots of other ins with the same company (homeowners, product liability, Rental property fire coverage, sugarhouse fire and building contents, chemical spill [I spray pesticides in my blueberries] and auto coverage on 4 vehicles. That may make a difference, the liability is just one or 2 lines in a huge policy. All of those are on 1 policy except the auto's which are on a separate one.
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Offline nybhh

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Re: LLC vs INC
« Reply #14 on: January 06, 2019, 09:29:36 AM »
Couple other points I havent seen mentioned.  LLCs are generally a little cheaper to setup with fewer operational requirements.  You also get to choose to be taxed as a sole proprietor/partnership OR as a corp.  You make the election before the end of the year for the following year but you can go back and forth each year as your tax situation changes.

In my non-sawmill related business, our accountant had us swap a couple of years ago from the partnership election to a corp election and it was as simple as checking a box on an IRS form. Dont know the exact reasons why but our taxes went down a bit when we did.

As others have said, keeping the business truly seperate is the main thing I think.  Setup a seperate bank account, get a separate credit card, etc. and dont co-mingle finances.  Good luck. 
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Offline CabinCreations

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Re: LLC vs INC
« Reply #15 on: January 07, 2019, 09:30:19 AM »
Thank you all for your input so far. I can see where insurance may be more critical to avoid personal liability rather than the business structure. However, choosing the most relevant structure still has me a bit confused. Does it really only come down to insurance?  

The key to liability insulation is true business separation between the LLC or any Corp, and your personal holdings, property, and equipment.
This is interesting to me, but does make sense. How would the separation between business and personal assets work for a portable sawyer? For instance, I would not be doing any sawing on my property for customers and so customers would have no reason to be on my property so there should be no issue with that, however the sawmill itself would be an asset of the business but would be parked in my personal garage. Could there be any issue there with mixing personal and business assets? 

Also, if I wanted to mill any of my own lumber for personal use, how would that be looked at for business separation since I am using an asset of the business? Could it be looked at similar to a company vehicle where greater than 50% of the miles (hours for a mill?) must be used for business?

Thanks


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Re: LLC vs INC
« Reply #16 on: January 07, 2019, 09:40:35 AM »
Maple my wife is currently working on our insurances, a bundle of homeowners, auto and umbrella.
Not sure of the liability coverages.
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Offline Resonator

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Re: LLC vs INC
« Reply #17 on: January 07, 2019, 10:30:43 AM »
Following this thread with interest!   
I set up my business as a LLC, and plan on asking my accountant when he does my taxes, what I should do differently going forward, trying to grow my saw milling income. I am also pricing insurance coverage. The only asset I have counted for the LLC is my mill, and he said I could write off part of the purchase price on the 2018 taxes. 
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Offline Southside logger

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Re: LLC vs INC
« Reply #18 on: January 07, 2019, 10:38:47 AM »
The easiest way personal liability is compromised when it comes to a business is by what is called "piercing the corporate vail".  It can be done a number of ways but it boils down to when folks set up a business and don't treat it that way.  No officers, no policies and procedures, no filings, no licenses, using the corporate checking account for personal matters.  

I am not an attorney and did not stay in a Holiday Inn Express last night but I don't see where parking the mill in your garage would cause an issue.  Folks have home offices all the time and that is not crossing a line.  As far as personal use of the mill, if you are concerned that someone might see you sawing a board at home and bringing it into the house then create a policy that allows use of the mill for personal purposes as long as you reimburse the company for fuel and maintenance at a rate that actually covers both - not $2.00 per hour for example - and then bill yourself, pay the bill, deposit the check into the account and keep the paperwork.  I have worked for employers who allowed personal use of equipment under such arrangements and it was never an issue.  Personally I don't worry about any personal use of our own stuff given the % is so small.  
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Riehl Edger
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Offline CabinCreations

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Re: LLC vs INC
« Reply #19 on: January 07, 2019, 11:07:51 AM »
Thanks, Southside. I appreciate your feedback (even if you didn't stay at a Holiday Inn Express last night :D). I felt the same way about the garage and personal use, but thought now was the time to get others opinions to see how the experienced sawyers handle things. I like your suggestion about billing yourself for fuel and maintenance though. 




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