Sole Proprietorship Advantages For One-Owner Businesses and Professions
Most one person professional business- such as attorneys or physicians- operate as a legal entity (P.A. or L.C.) . The professional is an employee who receives from the business a combination of salary and profit distributions. This business arrangement has tax advantages because it can reduce employment taxation, but it may not be best for asset protection when the business and/or the professional owner has a potential legal problem.
A judgment creditor has multiple collection tools in this situation. First, he can garnish compensation paid to the professional owner in the form of salary even if the owner has dependents. The sole owner of a professional corporation or professional LLC probably may not characterizes what he reports as salary as wages that are exempt from wage garnishment. Prior blog posts have commented on this law. Many cases state that when the debtor-owner controls salary distributions may not claim the wage exemption provided by Florida Statutes.
If the professional entity is a corporation, a professional association, the creditor can levy on the owner’s stock and shut down the business. If the professional entity is a limited liability company the creditor may also get a charging order on compensation paid as dividends when the professional entity is an . The creditor can also foreclose on the professional owner’s LLC interest in a single member LLC.
The single owner professional in this example would have better asset protection if he operated as a sole proprietor. He would lose the benefit of avoiding payroll taxes on earnings paid as profit distributions, but his revenue stream would be better protected from creditors. There would be no corporate stock or LLC interest susceptible to foreclosure. There would be no wages subject to garnishment.
The professional’s income would be received directly from his client/patients. A creditor would have garnish every payment receivable, and no continuing garnishment would be available. In the case of the physician debtor the creditor’s collection is somewhat easier because the creditor could garnish the insurance companies with which the physician has contracted, but again, there would be no writ of continuing garnishment. The creditor would have to serve repeated writs on each insurance company.
The creditor also would have difficulty garnishing payments from the attorney’s clients or the physician’s patients because of confidentiality and privacy laws pertaining to each profession. The debtor could assert defenses to the creditor’s attempt to discover who were the individuals who owed money for services from their respective attorney or doctor.
Sole proprietorship is underutilized as an asset protection defense for certain professional debtors, or any other business whose revenues depend upon the services or activities of the business owner.
Last updated on May 22, 2020
About the Author
Jon Alper is an expert in asset protection planning for individuals and small businesses.