Sole Proprietorship or LLC?

As a solo practitioner, you’ll need decide on a legal structure for your business.  The default structure for a single-owner business is known as a sole proprietorship.  As a sole proprietor, you’re legally identified with the business and can be held personally liable for things like unpaid debts, injuries to others, or damage to someone else’s property.

When I first started my practice, I had very few assets and, perhaps naively, wasn’t too concerned about protecting those assets from personal liability.  Protection from personal liability became more important to me as my income and assets grew, and after some time I did choose to form a limited liability corporation (LLC).  Some practitioners also hold off on forming an LLC if they’re trying out private practice very part-time, but make the switch later as their commitment to their own practice grows.

In Oregon, forming an LLC is a relatively straightforward process, but each state has its own restrictions or requirements for forming a professional entity.  Some states don’t allow professionals to form a standard LLC, but instead allow for professional limited liability corporations (PLLCs).  California doesn’t allow professionals to form either.   Filing and maintenance fees also vary widely from state to state.  Nolo, a company providing legal resources for consumers and small businesses, has a 50-state guide to forming an LLC here.

In a nutshell, LLCs are assumed to be separate entities from their owners.  This means that if your business finds itself in one of the situations listed above, the business alone is held legally responsible.  But an LLC doesn’t shield you from all liabilities.  For example, you can be held personally liable for your own malpractice (for protection there, you should obtain professional liability insurance).

You could also lose limited liability protection if a court were to find that there was no real distinction between you and your business.  For this reason, keep your personal and business funds in separate bank accounts and pay for personal and business expenses using the appropriate account (actually, no matter what type of business structure you choose, keeping your personal and business finances separate is important for tax purposes, establishing business credit, assessing profit and loss, etc.).  If you enter into an office lease, sign on behalf of the LLC and not as yourself personally.  And be sure to follow all state record-keeping requirements to help establish that your business is indeed separate from you.