Sole Proprietorship vs. LLC: Which is Best for Notaries?

Entrepreneurship involves weighing risk and reward. Running your own business isn’t easy, and one of the biggest challenges is deciding how to protect you and your assets. Notaries are required to obtain a surety bond to protect the public from mistakes, while Errors and Omissions insurance protects the notary from lawsuits stemming from a notarial error. However, mistakes made on the job shouldn’t be your only concern. 

Mobile notaries spend a lot of time on the road. What would happen if you got into a car accident and injured another driver? A lawsuit has the potential to cripple any small business and its owner, but there are options to help protect you from financial ruin. 

Not ready to be an entrepreneur but still want to make money as a notary? Join our online notary community. 

Sole Proprietorship vs. LLC

A sole proprietorship is a straightforward business structure. The business is owned and operated by one person, and that person pays personal income taxes on any profits.  

Under a sole proprietorship, the debts owed by the company are the debts of the owner. The profits are all yours too. According to the US Census Bureau, most small businesses are sole proprietorships.  

An LLC, or Limited Liability Company, on the other hand, is a legal entity formed at the state level that separates the owner and company assets. 

The type of business structure a notary or any entrepreneur chooses has a significant impact on your legal protections, taxation, and finances. 

📰  Related Reading: Three Things Every Successful Notary Business Needs

Benefits of a Sole Proprietorship

Many notaries start as sole proprietors doing business under their personal name or using a DBA or “Doing Business As” company name. 

Some of the benefits of being a sole proprietor include: 

• Simplicity 
• Easy to start a business 
• Straightforward tax filing  

It’s simple. Being a sole proprietor doesn’t require a business owner to file any paperwork (although you may still need to register as a business or purchase a permit depending on where you live and work). Because there is little paperwork involved, getting your business started under this type of structure is fast and easy. 

You don’t have to worry about setting up a separate business banking account. However, financial advisors suggest creating different accounts to make bookkeeping easier and create a clear audit trail. It’ll help you avoid an IRS nightmare of sorting through bank statements, invoices, and receipts when it comes time to report your earnings. Better records also mean you’ll be able to predict future profits, identify opportunities to grow your business based on which services are the most profitable, and set the right goals. 

You may obtain an employer identification number (EIN) from the IRS, but it’s not required as a sole proprietor. Alternatively, notaries may use their social security number when filing taxes instead of an EIN. 

These business owners report all losses and profits on an individual IRS 1040 tax return. The owner doesn’t pay separate income tax on the company. 

Disadvantages of a Sole Proprietorship

The simplicity of this business structure can come at a cost. Some of the disadvantages of a sole proprietorship include: 

• No liability protection 
• Difficulty obtaining financing and business credit
• Fewer options to grow or sell your business

There’s little protection against lawsuits because personal and business assets aren’t separated when running a company as a sole proprietor. Banking and raising capital for your business can also be more difficult as financial institutions will often require either an EIN, an LLC Operating Agreement, or other documents demonstrating solvency and good financial recordkeeping. Without these tools, it’s challenging to take a small business to the next level. 

Benefits of an LLC

Establishing an LLC is a common next step for sole proprietors focused on growth. While incorporation isn’t as simple and straightforward as a sole proprietorship, it comes will less paperwork and administrative hassles than other corporate entity options. 

Advantages of an LLC include: 

• Liability protection 
• Less paperwork 
• Flexibility in taxation 

Liability protection 

With an LLC, there is no mingling of personal and business finances and assets. As a result, you’ll need to open separate bank accounts or risk losing this protection. 

LLCs also make it easier to hire employees or establish a company with another notary co-owner without risking your personal assets should someone else in the company be sued. 

Less paperwork than other corporate entities 

While you’ll need to do more paperwork with an LLC than a sole proprietorship, an LLC is far easier to establish than other corporation options like S Corporations and C Corporations. 

In some states, you’ll need to create an operating agreement outlining: 

• Number of members
• Management structure 
• Tax considerations 
• Profit-sharing 

In other cases, the operating agreement may only be required if the LLC has more than one member. 

You’ll also likely be required to register your business name with your state, which sole proprietors are also required to do if they are using a fictitious business name or DBA “doing business as.” This process also protects your company name from being used by others within your state. 

Flexibility in taxation

Perhaps one of the greatest advantages of an LLC is the option to choose a tax status of either sole proprietorships, partnerships, S corporations, or C corporations. 

According to IRS Publication 17, notary fees should be calculated in gross income, and they are not subject to self-employment taxes. However, if you are charging non-notarial fees for other services like traveling to loan signing or couriering documents, this income will need to be declared for self-employment tax purposes. The self-employment tax rate is 15.3% and is paid into Social Security (12.4%)  and Medicare (2.9%). These calculations can get messy if you aren’t keeping pristine records of itemized fees. 

A way to simplify your taxes as a notary with an LLC is to file as an S Corporation. 

S Corporation owner-employees may pay themselves a “reasonable salary” of which social security and medicare will be deducted and allocate additional profits to the owners as distributions that aren’t subjected to self-employment tax. 

Reach out to a tax professional to help you establish what a reasonable salary would be and to ensure that this tax status makes sense for your business. 

Talk to a legal or tax advisor in your area

Consult an attorney or tax advisor if you’re unsure whether your notary business should be an LLC or sole proprietorship. Some states, counties, or cities may require every professional to obtain a business license or permit before collecting fees for services, so a local consultant is your best bet to ensure you’re running your business in full compliance with local and federal regulations. 

For most notaries, starting as a sole proprietor and notarizing under a business name makes sense until reaching a particular monetary threshold. If your goal is to work as a full-time independent loan signing agent, consider setting a benchmark and reaching out to a tax consultant to help you plan accordingly. Many offer free consultations for small businesses. This will help you determine what business structure and taxation plan work best for your business today. 

For those notaries who aren’t ready to run their own business, join our waitlist for part-time online notary work!

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