What is the best business structure for a plumbing business?
Building and owning a plumbing business not only needs your knowledge about the trade, but also requires strategic decisions to properly set up the business.
Selecting your business structure is one of the most vital of these decisions.
This choice affects daily operation, taxes, liability in case of debts or lawsuits and the ability to raise capital for development.
Sole proprietorship: The simplest option
A sole proprietorship is the simplest and most common form of business for small businesses, such as plumbing services.
It’s simple to create, requires very little paperwork, and the initial investment is modest.
A sole proprietorship is a business owned and operated by one person who alone takes all debts and obligations of the firm.
Pros of sole proprietorship
Ease of formation
Forming a sole proprietorship is easy and requires fewer legal formalities. All you really need is a business license and tax ID.
Full control
Being the only business owner means having full authority over all business-related decisions.
Tax benefits
This means that the profits you make are taxed as personal income and your company avoids double taxation.
This means the business owner files only one tax return, but he or she includes all of his or her businesses’ income and expenses on it.
Cons of sole proprietorship
Unlimited liability
The owner is personally responsible for all business debts and litigation.
That means if you are sued or your business has financial troubles, those bills could reach back to hit your personal assets.
Limited access to capital
If you are the sole proprietor of your business, access to funds will be difficult as, most often, it would come from personal savings or a loan.
Lack of continuity
The business goes out of its hands if the owner dies or retires.
Limited Liability Company (LLC): Combining flexibility and protection
One of the most favourable entities for a plumbing business is an LLC, and this is because it combines flexibility with some tax advantages while removing liability from the owner.
In structure, an LLC is sort of in between a corporation and partnership. Feel weird yet?
Well, as a real-world illustration, Arrow Plumbing & Heating company could opt to become an LLC for limited liability protection and management flexibility, plus take advantage of tax benefits.
An LLC gives the company a professional appearance, keeps owners away from personal liability, and aids scalability.
Pros of LLC
Limited liability
Members (owners) are not personally responsible for the company’s debts or legal acts, protecting personal assets.
Flexible taxation
An LLC can opt to be taxed as a sole proprietorship, partnership, or corporation. That kind of flexibility lets you choose the most tax-efficient solution.
Ease of management
An LLC requires less compliance than a corporation and provides more operational flexibility.
Credibility
Although having an LLC status may not be necessary, it gives a business owner credibility in terms of marketing to clients or working with partners and investors.
Cons of LLC
Formation costs
Creating an LLC has additional costs in the form of filing fees, which could be higher than those charged for sole proprietorship or partnership.
Ongoing compliance requirements
This means your LLC will have to follow relevant state regulations and annual filing duties, which can add extra administration steps on top of set-up fees.
Limited lifespan in some states
Without the protection of a special provision in the operating agreement to prevent it from doing so, an LLC can stop existing when one member dies or withdraws.
Choosing the best business structure for your plumbing business
The best business structure for your plumbing company:
- Risk tolerance: What level of exposure to personal liability are you comfortable living with?
- Tax implications: What are the tax benefits and weaknesses of each structure?
- Funding needs: What are your plans for fundraising and company growth?
- Administrative capacity: How much time and money are you ready to pour into the administrative stuff and compliance?
An LLC is a middle-of-the-road option that provides small plumbing businesses with some liability protection and tax flexibility while not being overly management-intensive.
But, if you anticipate your business growing substantially or appealing to outside investors, a corporation might be more fitting.
So, that’s all we have for you about the best business structure for a plumbing business. We hope that this guide has helped you.
