Q: I am purchasing an existing business that is currently a sole proprietorship. We have a limited liability company (LLC) already formed, with myself and my husband as the sole members. I am wondering if it is better for the LLC to purchase the business rather than me personally. My assumption is that having the LLC buy the business will protect my personal assets right at the outset. I will have to assume some existing equipment leases for which I will be a personal guarantor even if the LLC buys the business.
A: Your assumption is basically correct. By using your LLC to buy the business, you limit your liability for the seller's pre-existing debts except for those (such as the leases) you assume personally. Whatever tax consequences the transaction will have "pass through" to you and your husband as the owners of the LLC. The downside is that if your husband is not actively involved in the business you are buying, he is legally entitled to a percentage of the business's profits and losses. If you will be running this business without your husband's help, consider forming a separate LLC, with you as the sole owner, to buy this business.
You should also talk to your lawyer about buying the "assets" of the business, as opposed to the business itself. The purchaser of a business's assets is normally not liable for any liabilities the business incurred prior to the sale date.
There is, however, one big exception. In many states, even if you buy the assets of the business, you will still be liable for sales, use and payroll taxes the seller owes. The state may even disregard your LLC and look to you and your husband personally to pay these tax liabilities. Ask your attorney if the tax authorities in your state will issue a "clearance letter" stating that the seller is current in his sales, use and payroll taxes on the date you buy the business, and consider putting a portion of the purchase price in escrow with your attorney until the "clearance letter" issues.
Q: I am thinking of starting a homebased business, but I don't want people to know I am working out of my house. I also don't want to get a P.O. Box, because I am providing a high-end service and don't want to look like a fly-by-night operator. Are there any other options?
A: You should check to see if there is a private mailbox service operating in your area. There are a number of franchise chains--the largest is MailBoxes Etc.--providing this service, as well as many mom and pop stores. For about $20 to $30 a month, you can rent a box that will give you an actual street address. Instead of "Box 123," you would be "123 Main Street, #456." You will, of course, have to budget time to pick up your mail at least once a day.
Private mailbox services can be extremely convenient. Most provide copier, fax and other office machines for your use and sell basic office supplies. Their employees will also sign for registered and certified mail and overnight deliveries that are addressed to your mailbox, so you don't have to sit around the house all day for fear of missing an important UPS delivery.
Unfortunately, private mailbox services are sometimes abused by people who want to hide their identities in order to commit crimes, and the U.S. Postal Service has recently adopted strict regulations regarding their use. If you use a private mailbox service, you must designate your box number either with the number sign (#) (for example, "123 Main Street, #456") or the letters "PMB" for "Private Mail Box" ("123 Main Street, PMB 456"). You no longer can use "Suite," "Apt." "Unit" or other words that may mislead people into thinking you have a real office location.
Many people do not like to use PMB, because they are afraid (I think, rightly) that postal clerks and others will mistake "PMB" for "POB" when addressing or delivering your mail. Also, you will have to field a lot of questions from customers, suppliers and others as to just what PMB stands for. So if you use a private mailbox service, make sure your box number is designated with the number sign (#) when you have your stationery, return address labels and business cards printed.
One exception: if you use a private mailbox service and are applying to the IRS for a tax ID number, you must use "PMB" to designate your mailbox, as the IRS computers are not currently set up to use the number sign (#). If you use the number sign on an IRS form, the IRS will disregard your box number entirely and record only your street address.
Cliff Ennico is host of the PBS TV series MoneyHunt and a leading expert on managing growing companies. His advice for small businesses regularly appears on the "Protecting Your Business" channel on Small Business Television Network. E-mail him at firstname.lastname@example.org. This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state. Copyright 2003 Clifford R. Ennico. Distributed by Creators Syndicate Inc.
Cliff Ennico is a syndicated columnist and author of several books on small business, including Small Business Survival Guide and The eBay Business Answer Book. This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state.