Hi, I do some websites from time to time and see within the next year to get a steady flow of work, and was wondering at what time have most people here usually decided they should apply to become a business?
I was thinking of an LLC. I know the taxes are filed on your personal income tax forms, and the liability is placed on your LLC and not yourself.
Any other reasons to apply for one?
Business Formation Issues
One of the first things you need to do when starting a new business venture is decide on the type of business entity you wish to be. A business can be run as:
• a sole proprietorship,
• a partnership,
• a corporation or
• a limited liability company.
Choosing which type of entity to use in your business venture generally comes down to two issues; limited liability, and taxation.
Corporations and Limited Liability Companies (LLC) offer limited liability to their shareholders while sole proprietorships and partnerships do not. In the interest of brevity, I will not further explain sole proprietorships and partnerships other than to say that if you are in business online today either one of these are clearly not a good idea. This will become clearer as we explain the many benefits of limited liability with regard to corporations and the LLCs.
Truth & Misconception of Limited Liability
There are many misconceptions concerning the concept of limited liability. The premise of limited liability relates only to the investor’s financial responsibility for the debts of the entity. In a limited liability entity, once the shareholder has made their investment they have no further obligation with respect to the entity’s debts. However, a shareholder, particularly a shareholder who is active in the business operations, is still liable for the criminal and tortuous (i.e. negligence, fraud, sexual harassment, etc.) acts they might commit in connection with the business. Limited liability entities do not shield you from lawsuits based on issues other than debt.
Double Taxation Issues
While a business conducted as a sole proprietorship or a partnership does not provide limited financial liability to the owners, these entities have an advantage over the corporation when the tax man cometh. For the purpose of calculating taxable profit, corporations are treated as a separate entity and charged taxes on the profit they generate, with the added liability of being assessed at a higher rate than the rate used for individuals or partnerships (which are taxed are the individual’s rate.)
Adding further insult to injury, distributions to shareholders are taxed to the recipient, which in effect taxes the profits of the corporation twice; once as a corporation, and once again when distribution and doled out as income to shareholders.
As you can see, when deciding between running your business as a corporation or as a sole proprietorship or partnership, you need to balance the need for limited financial liability against the prospect of higher tax rates and double taxation. But there is a work around that many smaller corporations use to avoid the double taxation issue.
Single Taxation Solution with Limited Liability
For hundreds of years businesses had to accept double taxation in exchange for limited liability. However, in the 20th century two new options were created for US businesses. One involved registering the corporation with the IRS as an S-Corporation, rather than the standard C-Corporation. This allowed the corporation’s shareholders to maintain the limited liability of the corporation; however, they were taxed like a partnership at the individual’s rate as long as they adhered to a strict set of accounting principles. Unfortunately, these strict accounting principles were a nightmare to handle and created large accounting bills for the S-Corps and consequently S-Corps were not widely created.
The other workaround from the double taxation issue is a late 20th century invention called the Limited Liability Company(LLC). This beauty has all the creature comforts of our beloved corporations with regard to limited liability, while streamlined accounting standards and requirements make it the preferred form of new business entity formation in these modern times.
By providing partnership taxation treatment along with limited liability for shareholders and greatly simplified regulations, the LLC has become the most popular business entity in the U.S. today.
Other considerations in choosing your entity:
Note: If it were not obvious yet, the author of this report feels that the LLC is the best option for new ventures and budding entrepreneurs. However, many of the reasons for choosing one operating entity over another are accounting related. Discussing your plans and the reason for picking an entity with your accountant would be a wise move.
I suggest not going public with your actual business until you start making an actual years worth of wages from your online stuff. There is no point unless you are getting paid through google and other big companies that you know are filing their taxes.
It was my understanding that if someone were to sue your business they can only take what your business is worth and therefore not dig into your personal wealth.
LLC are pretty cheap, I know in Ohio they are $125.
I think what you truly get out of them when you’re starting out is, sometype of legal recognition of your business name, although it’s not a trademark, it does prevent someone else from opening a business with the same name. Also any business expenses you can write off. I’m not sure how expense writeoffs work with being a sole proprietor.
Also I think it legitmizes your service, people see they are dealing with a company rather than an individual and that could def have some benefits.
I was just wondering is it practical that everytime you have a business idea or some revenue generating side project, if you should go and register for?
Unless you have special liability concerns, you should incorporate when you will see a tax benefit from doing so. You can ask your CPA about this. For many businesses, it’s not worth it until you reach around 50k of revenue but that’s a wild rule of thumb - it all depends on your net and how the money breaks down.
If in doubt and you aren’t earning much, I’d stay a sole proprietor and build up. No reason to pay for an LLC that isn’t’ doing anything for you.
I don;t think its entirely true that forming an LLC voids you personally of all liability but ask your lawyer. Having helped business’s for years now on the selling end I’d say form an LLC as early as you can. Its very cheap and only becomes more difficult down the road. I agree with a previous comment as well, it adds a aura of legitimacy as well.
I’m not sure I agree. You don’t think small businesses file their taxes?! My dad owns a small business and he said anything over $XXX amount they file.
You’re a lot more marketable if you’re an actual business, people aren’t hesitant to think, is this guy going to actually deliver, can he be trusted etc. They get a warm cozy feeling knowing that they are dealing with professionals. (not saying all businesses are flawless, but it’s the perception)
Filing for a business is fairly easy and cheap.
And besides you can write off a lot of expenses… laptops, computer screens, softwares, dinners, gas, domain and hosting expenses etc. 