by Sarah Wright, MS, ACT and Viveca Monahan, CPC, ACG

Many coaches work part time and have probably never even thought of creating their own official business. But as a professional, creating a legal structure for your coaching business is an important step. In this article, we’ve summarized the most salient aspects you should know.

There are five basic legal structures for businesses. For detailed descriptions, please visit the IRS site or the Small Business Administration. Concisely they are:

  • Sole Proprietor,
  • Partnership,
  • Corporation,
  • S Corporation, and
  • Limited Liability Company or LLC.

Of these, the two used most commonly by coaches in practice for themselves are Sole Proprietor and Limited Liability Company (LLC). In this article we will discuss the advantages and disadvantages of each. Please consult with a qualified accountant or lawyer with regards to any legal changes you are considering for your business.

Advantages to a Sole Proprietor Company

A sole proprietor company is the simplest to set up and maintain. As a sole proprietor you are the business. After obtaining appropriate state and city permits, you are ready to go. While it is always advisable to keep your business and personal records separate, you are not legally required to establish a separate business checking account as a sole proprietor. What is required, in this and any business, is that you properly reflect your business income and expenses. When tax time comes, you file a business Schedule C or C-EZ, both of which are relatively simple to prepare, with your personal tax return. Generally, sole proprietors are not required to get an Employer Identification Number (EIN), because the owner’s Social Security Number can be used to identify the business.

Disadvantages of Sole Proprietorship

In legal matters there is no distinction between you and your business. You are one and the same. A sole proprietor accepts all the risks of the business, meaning you are personally liable for any judgments against the business. An audit of you personally would also audit your business, and vice versa.

Advantages to Limited Liability Company (LLC)

An LLC provides a high degree of personal liability protection, but you must maintain business records completely separate from your personal records. This form of business shields your personal assets from creditors and law suits. However, given the small size of your company, you may be asked to personally sign for any business loans or credit cards. Otherwise the company is seen as distinct from you, both from tax and from legal perspectives.

Disadvantages of LLC

Compared to a sole proprietorship, an LLC requires more paperwork. You need to file a form (Articles of Incorporation) with the state and pay a fee in order to create the LLC. In addition, you have to pay annual fees to maintain an LLC. A special Employer Identification Number (EIN) is required and extra care must be exercised to keep business and personal finances separate.

Summary

There are advantages and disadvantages of both forms of business structure. The sole proprietor form is simple to start and maintain and has minimal fees. You are, however, personally liable for everything you do both in your business and outside of it. They both affect each other. If you want ease and simplicity and not concerned with the risks, this might be your choice.

The Limited Liability Company is more complicated to start up and has more recordkeeping requirements, as well as start up and annual fees. You may need a lawyer to draft up your documents. Your personal assets, however, have a great deal of protection from liabilities of your business. In addition, what you do in your personal life may not affect you LLC to the degree it would in a sole proprietor. If you want protection from the threats and liabilities of owning a business, and willing to manage the added costs and recordkeeping, this may be the right business structure for you.

We encourage all our members to learn about the various business structures and talk to an attorney or certified public accountant about your business and discuss the right format for your particular situation.

Next month we will look at Liability Insurance: what it covers, who should have it, and where to find it.