LLC vs INC

[CabinCreations]

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

[Southside]

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.  

[WV Sawmiller]

   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.

[CabinCreations]

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?

[BradMarks]

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.

[Darrel]

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. 

[Southside]

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.   

[YellowHammer]

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 isn't 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.  

[petefrom bearswamp]

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.

[BradMarks]

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".

[YellowHammer]

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.

[Crossroads]

Pete, you may want to check into an insurance policy. I hate paying for insurance as much as anyone, but it's a thousand dollars a year that helps me sleep better at night, knowing that if my mill get stolen,it's covered and if I get sued, there's at least a cushion between me and the sewer. And the premium is deductible on your taxes...

[D6c]

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.

[maple flats]

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.

[nybhh]

Couple other points I haven't seen mentioned.  LLC's 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. Don't 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 don't co-mingle finances.  Good luck. 

[CabinCreations]

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

[petefrom bearswamp]

Maple my wife is currently working on our insurances, a bundle of homeowners, auto and umbrella.
Not sure of the liability coverages.

[Resonator]

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. 

[Southside]

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.  

[CabinCreations]

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. 

[WV Sawmiller]

CC,

    Even if you think you will be doing only mobile sawing I'd bet you end up doing an occasional small sawing job at home so I would plan as if that were the case. You will find the customer with a 6' log he wants ripped into live edge boards or a mantel or such. Probably a 5 minute job and not worth the hassle of moving the mill but can be good money for the time and effort required.

    As to the insurance I have the Liability and it costs me a about $650/year. I looked at an inland marine policy to cover the equipment and decided it was not worth the extra cost in my case. It would be painful but not catastrophic if I lost my equipment and I could replace it. I could not handle a huge liability claim the same way. 

[nybhh]

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

I'm not an accountant - speak to yours but I believe:
Your business can pay your person rent for the storage space of the mill.  You may also be able to deduct portion of your property tax, mortgage, phone and electric bills, etc. as a business expense.  There are a lot of options here and you and your accountant will just need to discuss the pros and cons of each.  

Your business can saw for you and charge you nothing for the work.  Or just don't keep records on that.  A sawmill isn't like a car or boat that the IRS is going to think is REALLY a personal expense you are just BS about for a deduction.  

When people talk about separating, it is more about finances than the personal "use" of a mill or something like that.  Think of it this way, if the business gets audited, the only records that should need to get handed to the IRS is the "business" account information and records.  You shouldn't have personal purchases or non-business expenses in those records and you shouldn't need to hand over personal account information because every deduction your business is claiming is supported with purchases made through the business account/credit card, etc.

[YellowHammer]

II'm not an insurance agent, but have spent quite a bit of time and money working to get coverage for all our activities.  

Separation is key, if you get in big claim, and are an LLC or Corp, you will be sued for the largest amount of your business assets, which is either your business worth, or the value of the insurance policy, whichever is greatest.  If your personal property and financial accounts are intertwined with your business property then both may be viewed as a combined whole and claimed against.  So set up a true business account with your bank and run your financials from there.  

Another point is that some business insurance policies will allow "occasional and infrequent" visitors, but balk at "frequent" visitors on business or farm property unless the property passes several types of audits, including having all the buildings inspected by the Fire Marshall, power company, etc just like any public access business.  Then you become more of a storefront and must abide as such.  

If you do any kind of work on your personal property, and business is defined as involving money or profit, then if someone gets hurt or property gets damaged it's not covered unless you have it under a business policy.

Bottom line, ask forcefully about specific scenarios with your agent.  Ask to see where it is actually written in the policy.  Do not take a "sure, it's covered" unless you see it in writing.  

Many insurance companies will run like the wind when a sawmill is involved, and believe me you don't want to get on the phone with a regional agent working a claim and get an answer like "Mr. Milton, I have your policy right in front of me and I don't see specifically where that is covered.  Do you?  No?  Then it's not.  Sorry."

I have definately been there done that.  

Unfortunately, of all the external forces that have driven our business direction, the most powerful of them all has been insurance.  

[Crusarius]

I was always under the impression that the best separation was to be an employee of the company and pay your salary from the company accounts. Keep anything that is business under those accounts and anything personal out of them. 

I do not know how that works though since there needs to be a boss, right?

Thanks for starting this thread. This will help many ppl tremendously. Me included.

[YellowHammer]

You are correct. The boss and officers should be paid from the company account. 

[nybhh]

I was always under the impression that the best separation was to be an employee of the company and pay your salary from the company accounts. Keep anything that is business under those accounts and anything personal out of them.

I do not know how that works though since there needs to be a boss, right?

Thanks for starting this thread. This will help many ppl tremendously. Me included.

Yes.  Where a lot of small business mess up is in the early stages when the business may not have money in its bank to pay all its expenses so you pay them out of a personal account.  This may feel like a neccesity but this is how the "co-mingling" usually begins and it makes the record-keeping all but impossible for all but the most anal-rententaive of record keepers.
By far the best way to handle this is to write the business a check and then pay the expenses through the business rather than from a personal account.  For an LLC, this is called a "capital contribution" and when you take money out of the account - it is called a "capital distribution".  If you make a $5,000 capital contribution to the business so it can pay its expenses, the first $5,000 you take out afterwards isn't "salary" or income, it is just  a distribution that nets out the initial contribution and you won't owe taxes on that money, it is just a loan repayment.
Besides the legal separation, one of the main advantages of keeping things so rigorous is it keeps bookeeping and taxes so much easier.  You can simply print out a bank and credit card statements every month or so and add and subtract everything.  Deposits from clients = income, withdrawals = expenses.  Deposits from you = capital contribution, checks/withdrawals to you = capital distribution.  Easy peasy.

[Southside]

Not sure if it's the same with an LLC or not but my accountant has always made our business pay us back with interest on a schedule for any loans we made to the business, I guess it keeps it the same as if a bank were to loan the business money so it helps keep things clear.  

[Crusarius]

Thanks nybhh. Makes me feel better to know I am not crazy  

[DMcCoy]

C corp here for 19 yrs. The reason for us was financial not liability.
I cannot stress enough the need for a really good accountant.  They can all fill out forms (hopefully) and then there are ones who know what you can and should do or shouldn't.  Ask questions and if you don't get a well explained and understandable answer then you might look elsewhere. There are bright accountants that can't explain things, go too fast, or gloss over areas like they are insecure with you understanding what they do. You need to understand the working concepts if you are going to do this.

We loan the business money and have it pay us back with interest.  Charge the business rent for the areas it uses for business.  Take money out of the business as a paycheck.  We use a payroll service.  Be happy paying taxes it means you are making money.  We drain the business down at the end of the tax year by taking a bonus (personally pay taxes the business shouldn't) and then loan the money (operating loan) back and charge interest.
Get the insurance. 
Don't buy stuff you don't need.  I hear the term "write offs" like it is some source of free money, most often by non business people.  Stupid idea and a stupid mind set.  Call it expenses because that is what they are.  Keep you expenses low, don't buy stuff you don't need.

[flyboy16101]

I'm a sole proprietor operation. From what little research I did it sounded to me like others have said that llc or inc is a tax thing mostly. I would talk to your accountant to see what they say based on your situation and ask why. The big thing I was worried about was insurance. It was difficult to find a company that was able to place a portable sawmill due to it being portable. And most of the companies that would cover it normally couldn't be cause they were not licensed in PA. If you would like the number for the guy I use PM me and I'll send you his information. A lot of companies I talked to could place my account only if I was at a fixed address, so if I went to a portable job and something happened I would not be covered. The way I am covered now as a portable operation is that if I saw at the house I treat it like a I'm at a customer's location. As far as I can tell I have my insurance set high enough so that any claims will be stopped by it and not come back on me. I also have inland marine coverage on the mill because I know of a lot of issues that contractors and farmers around my area have had with vandalism. I have been told that if someone is hurt while vandalizing your equipment (i.e. they fall off of it and break a leg) you are still liable for the injury even though they were in the wrong. I don't agree with that but that's how the courts see it. I started out only wanting inland marine but because of this I also got the liability coverage.

Another thing to consider is your vehicle and if you need DOT numbers. I was worried about my personal insurance not coving the mill in an accident since it was a business. So I left my truck registered in my name but insured it through the business I was told I could do this because I am a sole proprietor. Part of the insurance problems is because I have DOT numbers so that I can legally haul my skid loader to jobs if I need it, or to cross state lines. If truck registration weight plus sawmill weight equals 10,000lbs or more and you are crossing a state line for business you need DOT numbers.

My book keeper did push the issue that I needed to keep a separate bank account for the business. I bill myself when I saw for me to keep the books cleaner.

[terrifictimbersllc]

As far as federal income tax,  a single member LLC is called a "disregarded entity" and treated the same as a sole proprietorship (it is "disregarded" for federal tax purposes).  Both file schedule C and that net income reports out on 1040 as business income.  

LLC stands for limited liability company.  Its purpose is to be a separate entity from the individual and to help separate any liability to the LLC entity.  How effective that is, and how to make it as effective as possible, surely is a topic for discussion, but I don't know of any tax advantage.

[CabinCreations]

Even if you think you will be doing only mobile sawing I'd bet you end up doing an occasional small sawing job at home

This is a great point, but say I mill a small job for a customer at my home and someone is injured. Would this be a claim for my home insurance or business insurance? I feel that this is where things can be muddy and one insurance would try to push it off to the other. I suppose if you treat it like Flyboy just described:

if I saw at the house I treat it like a I'm at a customer's location.

then it would be strictly under business insurance?

Another question, you must have an address for your business, right? If the address for the business is the same as the "customer's address" can there be conflict there still? Or can you set up your business at some "fake" address to avoid that entirely?

If any of my questions seem unnecessary, please let me know. I am just trying to get my grips on as much of this as I can and may easily be reading into some of this too much....

Flyboy - I'll take you up on your offer, a PM will be sent momentarily. Thanks for the advice on the truck DOT numbers too.

Thanks!

[flyboy16101]

My home address is set up as my office/shop. So if something were to happen in the garage I would assume that homeowners would push it off on the business insurance. I have been told that most homeowners insurances will drop you on the spot if they find out that you are operating an uninsured business from your house. I was told that by a guy who dose excavating, I have to take his word on it I never looked into it any further. But he also said that this included just parking equipment or having your office there. Regardless I don't think home owners will cover you if something were to happen.

[WV Sawmiller]

  

Even if you think you will be doing only mobile sawing I'd bet you end up doing an occasional small sawing job at home

This is a great point, but say I mill a small job for a customer at my home and someone is injured. Would this be a claim for my home insurance or business insurance? I feel that this is where things can be muddy and one insurance would try to push it off to the other. I suppose if you treat it like Flyboy just described:

I have no experience to qualify this statement but I would bet that your homeowners insurance would not cover such a claim and I would not be surprised if they dropped you shortly after asking. You can pose the question to your homeowners insurance but don't be surprised if they drop you then too.

  My photographer wife had insurance through Hartford for many years and we were considering offering photo tours in my boat on our local lake. We often take friends down there and take neat pictures of eagles, water birds, wildlife and landscape. She offers classes locally though Hobby Lobby and at home so had liability insurance for many many years. She called and asked about our proposal to see if we were covered or what changes we needed to make for coverage - basically was it feasible. Shortly thereafter they called back and canceled her policy because they looked at her website and saw our Africa and Alaska pictures and said she worked with "dangerous animals." They never asked if we had customers along or such, which we did not. We subsequently got coverage through the agent who handles my sawmill insurance.

[Southside]

WV are you sure they weren't looking at pictures of Papa Smurf when they decided she worked with "dangerous animals"?  :D

[WV Sawmiller]

Southside,

   Please remember one of the rules here on this forum is we are supposed to be nice to each other. ;) :D