Do You Need an LLC or S Corp for a Small Part-Time Business?

When Money is Tight and Risk is Low, an LLC or S Corp are Less Valuable

Woman with receiptsPeople starting a small part-time business have asked me whether they should invest in forming an LLC or S corporation. In short, my answer is generally “no, save your money.”

When you start a business, money is tight. Do you really need to invest in forming a legal business entity? The answer depends on how small or large the business will be in the beginning.

If you are investing significant money or time in the business, or you expect significant profits, you should most likely invest in establishing a solid foundation, which means forming an S corp or LLC.

However, if you are making a small amount of money from the business—such as a few thousand dollars per year—and the business is not high risk, most business owners would prefer to keep their money instead of spending it legal fees to form an S corp or LLC.

Below is a more detailed explanation.

Question: Should a Part-Time Business be in an LLC or S Corp?

Here is an example of a question I recently received:

In the summer, I mow lawns for several people and a small business. Someone suggested I form an LLC or S corp. Would there be any reason why I would need an LLC or S corp for a small part-time business like this in case something would ever go wrong? For example, there is a remote risk someone could be injured, like if a stone few out of the mower and hit a child. If I should form a business, is that a lot of work or just a little paperwork?

Answer: If the Risk is Low, Don’t Start an LLC or S Corp

In general, the cost of establishing an LLC or S corporation for a small part-time business is probably not worth the benefit.

When I give business law seminars, I often use a small summer lawn mowing business as an example of a business with such low profits and risk that it’s not worth spending the money to register a business entity. When considering the return-on-investment of forming an LLC or corporation for a small business, the risk mitigated is small compared to the cost of forming and maintaining a business entity (e.g. an LLC or S corporation). Said another way, while an LLC would reduce some risk, it would also cost a substantial percentage of the profits derived by the business and require additional time doing paperwork each year.

As a point of reference, our firm charges a flat fee to form a single-owner LLC or corporation. The fee is based on your specific needs. For example, the fee is higher if there are multiple owners and a buy-sell agreement is needed.

Personal Liability

Also, each worker in the business is personally liable for their own actions, despite having an LLC or S corporation, so whoever is working in the business would likely have personal liability for an injury regardless of whether they were operating in an LLC or S corporation.

Tax Deductions for Business Expenses

You do not need an LLC or S corporation to deduct business expense on your federal income taxes. You can deduct business expenses on Schedule C of IRS Form 1040. Without an LLC or S corporation, you are a sole proprietor, authorized to deduct business expenses and pay income tax on the remaining profits of the business.

Learn More

Here are articles on setting up an LLC yourself and related information:

Leave a Public Comment

  • Sarah R Walsh
    April 15, 2015, 10:47 pm

    If it is a small business and there is a concerned about risk of personal assets, a conversation could be had with an insurance agent. Most insurance companies will allow that person to take out/increase benefit on a umbrella policy or a business policy. This insurance can help mitigate risk with little expense AND the additional expense is deductible on the above mentioned Schedule C.