Many auctioneers work as sole proprietors; however, that is rarely the best business arrangement.
Here we discuss the various business structures found in the United States. Auctioneers are advised to look at alternatives to sole proprietorship structures and choose some arrangement with increased liability protection.
Business structure laws vary by state, so it’s also important for auctioneers to decide which state to consider their business location, and verify the desired structure is available in that jurisdiction.
Here are generally the eight different business structures available to auctioneers:
- Sole Proprietorship
- General Partnership (GP)
- Limited Partnership (LP)
- Limited Liability Partnership (LLP)
- Limited Liability Company (LLC)
The sole proprietorship is the easiest form of business and the default type of business if no other is chosen. The advantages include ease of operation, low cost and single (pass-through) taxation. Disadvantages include no increased liability protection, the business not surviving the death of the owner and difficulty attracting investor capital.
A general partnership is similar to a sole proprietorship but involves more than one owner. The advantages include ease of operation, low cost and single (pass-through) taxation. Disadvantages include no increased liability protection, each partner liable for the other partners debts and difficulty attracting investor capital.
Limited Partnership (LP)
A limited partnership involves general partners and limited partners. The general partners run the business and are personally responsible and liable for the partnership’s debts. The limited partners contribute capital (cash) to the partnership, while not managing the business and are only liable commensurate with their financial contributions. The advantages include the ability to raise capital, separate levels of management, ease of operation and single (pass-through) taxation. Disadvantages include some increased cost to form and a less than optimum level of liability protection for the partners.
Limited Liability Partnership (LLP)
A limited liability partnership is similar to a general partnership except that each partner is only responsible for their own debts and related liability. Many states restrict this structure to only certain professions. The advantages include increased liability protection, ease of operation and single (pass-through) taxation. Disadvantages include some increased cost to form, difficulties in raising investor capital outside of the partners and selling the LLP in entirety.
Limited Liability Company (LLC)
The limited liability company combines desired characteristics from a partnership and a corporation. Members of an LLC have increase liability protection over a sole proprietorship and partnership while retaining ease of operation, as well as single (pass-through) taxation. The disadvantages only include an additional cost to form and a tendency of outsiders to avoid investment.
An S-corporation is a corporation that chooses to be treated as a pass-though taxation entity (different from a C-corporation which results in taxation at the corporation level and the shareholder level;) other advantages include maximum liability protection. Disadvantages include increased cost and filings to form and maintain and limitations on the number and location of stock holders.
A C-corporation is a corporation that chooses to forgo pass-through taxation. Both C-corporations and shareholders pay tax on income. Other advantages include maximum liability protection and no limits on number or location of shareholders. Disadvantages include increased cost and filings to form and maintain.
A nonprofit is a special business structure formed to benefit the public, a specific group or the membership of the nonprofit. The most common nonprofit tax treatment is a 501(c)(3) status, where the organization is exempt from income, sales and property taxes if activities have certain purposes: charitable, religious, educational, scientific, literary, etc. Other advantages for a 501(c)(3) include maximum liability protection and the ability to secure federal and private grants as well as tax deductible donations. Disadvantages include increased costs for formation and maintenance of the organization.
Today in the United States, the most common business structure is the Limited Liability Company (LLC.) It is considered the most likely appropriate business arrangement for most auctioneers. The exception would be the Nonprofit structure which would be essentially required for “donation-based” auction models.
Lastly, all auctioneers should consult with three distinct professionals regarding the appropriate business structure: An attorney, an accountant and an insurance agent. Combining the legal, financial and risk assessment perspectives of these experts will result in the appropriate structure being chosen.
Mike Brandly, Auctioneer, CAI, AARE has been an auctioneer and certified appraiser for over 30 years. His company’s auctions are located at: Mike Brandly, Auctioneer, Keller Williams Auctions and Goodwill Columbus Car Auction. He serves as Adjunct Faculty at Hondros College of Business, Executive Director of The Ohio Auction School and Faculty at the Certified Auctioneers Institute held at Indiana University.