Should I register my company as an LLC or a Sole Proprietorship?

Question

I'm an individual product developer / invention specialist, and I'll basically be licensing my product ideas to manufacturers. Thus, they'll be the ones assuming the financial and legal risks (and will keep 93% of the product profits to boot).

So is there a compelling reason to become an LLC? Something I haven't considered?

Answer 1

First, let me clear something up.  There is no tax advantage in becoming an LLC.  Like a sole proprietorship an LLC pays no federal income tax.  Instead all of the profits are passed through to the owner who is stuck with the taxes.

I don't like LLCs, but in your case becoming an LLC makes sense.  Picture a situation where you are named as a defendant in a class action suit arising from a manufacturing defect in a product you designed and you lose.

If you are a sole proprietor you could lose everything. As an LLC you can only lose whatever assets the LLC owns and/or receives after the suit is filed.  

Because this could include future earnings of the LLC I would recommend that you start a separate LLC for each product on which you will be collecting royalties.

Hope this helps

Jerry-the-bookkeeper