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Ask Slashdot: When Is It a Good Idea To Incorporate?
First time accepted submitter stairmaster writes "A couple of months ago I came across an opportunity to supplement my income by doing some consulting work (read mobile app development) on the side. It appears that I will be doing this work for some time and my question for you is this: is it worth it to incorporate as a business? I know that the answer to this question is extremely dependent on circumstance but I'm interested in your experiences. Have you been in a similar situation, and if you have how did it work out for you?"
If you have any assets at all, it's a good idea to incorporate to shield them from lawsuits. (It puts the Limited in Limited Liability)
If for no other reason, incorporating (S-Corp or LLC) gives you some legal separation between your personal and work related finances. Buy an general liability insurance policy (~$250/yr) and you're good to go.
Two main reasons to incorporate are liability and taxes. Liability probably isn't a big problem for you. Taxes come down to how much for how much. There are costs associated with incorporating, including your time, separate bank account, state and federal filings, etc. If you incorporate, do it because the tax savings clearly outweigh the costs.
Also, don't bother with a corporation (S or C). If you do this form an LLC. There are many advantages which you can google if you are really interested.
It limits your personal liability. If you are doing consulting, there is always the possibility that you will err and have someone come after you. Better for them to come after your business than yourself personally and possibly lose your home and other belongings. (They still can but it does make it harder.) It is cheap and easy to incorporate and I can't think of many downsides other than trying to save the $50....
I incorporated when I decided that I wanted to file small business tax documents, claiming my expenses to and from the workplace (and my expenses included everything from clothing to gas).
Check out Schedule C - filing as a sole proprietorship:
http://en.wikipedia.org/wiki/IRS_tax_forms#1040
http://www.irs.gov/pub/irs-pdf/f1040sc.pdf
It really does depend. It depends on multiple factors. These include: where you are (and thus the legal situation); how much money you are thinking you will make; how much tax you'll have to pay on that money as an individual as compared to a corporation; whether you need the limited liability that incorporation offers; etc.
Maybe a good idea to talk to a lawyer if you aren't sure. Also, there is probably a lot of information on the web for where you are. Maybe also talk to your local chamber of commerce?
Personally, as an Australian I wouldn't bother incorporating until the amount of income from my free lancing work reached enough that it would be worthwhile tax-wise to incorporate. Otherwise everything is just easier as a sole propriator. In Australia you also have to worry about GST, my advice would be to not register until you have to (it's just easier). Though you will get people who are stupid and think that you have to ask for GST, you don't if you're not registered. Just make a note on the invoice that the amount does not include GST.
m m
...by doing some consulting work (read mobile app development)
If that's what you mean whay not just say it?
...by doing some mobile app development
If you want news from today, you have to come back tomorrow.
I'm an S-corp and there are huge benefits in tax write offs compared to filing as a 1099, but filing as an S-corp sucks, an you will need an accountant. I would go to an S-corp as soon as you think you are making enough to pay and accountant about $1k a year or are buying or spending good money on anything that could be considered work related, i.e. computers, cell phones, car expenses.
You may just want to consult an accountant on the decision as they can tell you the exact benefits after looking at your situation.
If you just want to take the revenue as personable income right away then it doesn't make sense to incorporate. If you want to leave the money in the business to be taxed at a lower rate then yes do incorporate. The running costs of doing an extra set of books..accounting etc are there so if its just an occasional side project then I wouldn't do it.
Do you believe you can be sue by someone purchasing your applications? Do you believe you might be on the short end of litigation by another developer who claims you copied his trademark or patent?
The problem with incorporation is the paperwork nightmare that goes with it and if you draw a salary, the need to do more for soc. sec, medicare, unemplyment, etc.
If you can treat the income from the work as instead your savings you might avoid much of that by drawing no salary 'until such a time as revenues reach X' where X is some stupid large number. When you are through with developing you can do a return of capital to the shareholders and dissolve the corporation.
Of course, always check with one of your lawyer friends first.
When the rights of corporations exceed a person's rights, then you should incorporate.
Not when it involves legal matters. Talk to an accountant or a lawyer.
Do you even lift?
These aren't the 'roids you're looking for.
I've been running my own consulting gig via an LLC since 2006. It does have some advantages and is cheap to set up. (Cost me $125 filing fee with the secretary of state's office.) Two things I'd advise:
1. Talk to your insurance agent and buy an umbrella/general liability insurance policy. There's an "errors & omissions" kind of policy that might be perfect. But a general liability may suit you also (it's what I have). But you should definitely talk to the agent about it.
2. Talk to an attorney. Pay $75-$100 for a one-time consultation with an attorney and get their advice on what kind of business model suits you best. The LLC worked best for me. It may be right for you but I can't say. Maybe there are specific advantages to an S-Corp in your case. I don't know. But an attorney you pay to help you make the decision should.
You may also want to talk to an accountant about it. I skipped that part and many people I know in similar situations think I'm an idiot for doing so.
I've owned and maintained an LLC for about the last 3 years. I own 99% of it and 1% is controlled by my father. I did this so I could continue to maintain the protection that the LLC structure offers. In the event that I would ever get sued my personal assets should be shielded from the lawsuit. (Not that I plan to get sued but you can never be too careful).
I was able to incorporate in the State of Pennsylvania (where I live) for a filing fee of $125. I was also able to to register for an EIN with the IRS for free. From there I opened a bank account and got moving. I do limited consulting from time to time as well as manage a couple of servers for some folks. I keep everything totally separate. At the end of the year I work with a local accountant who charges me $125 to $200 to complete my LLC taxes with the State and the Fed.
There are some inherent benefits to having an LLC. I'm able to purchase business equipment such as laptops, computers, supplies, etc... with pre-tax money which lets my dollars go much further.
Additionally other businesses automatically seem to take me more seriously when I reach out to them for software, equipment, services or as a potential client.
If you are already tracking your spending it's honestly not a lot of work. You just have to keep track of your income and expense for your business. If you are small a spreadsheet and some folders for paperwork will work just fine.
The LLC structure has been extremely easy for me to manage and most months I don't even think about it. The only advice I have is avoid those "we incorporate you" websites. Chances are pretty good if you do a little bit of research you will be more then able to handle this yourself. Also reach out to the state that you are incorporating in, you'll be surprised at how helpful they can be with the process.
Let me know if you have any questions or concerns, I'm happy to help.
The down side is that it takes a lot of paperwork, a relationship with a lawyer and an accountant and your taxes get a lot more complicated. Also, the IRS is well aware that a corporation makes a good tax dodge, so you have to be careful to keep good records and not run afoul of them. And be able to prove to them that you're on the level when they come asking. They probably WILL come asking.
I'm trying to teach myself to set people on fire with my mind... Is it hot in here?
I don't see it making too much sense unless you plan on becoming huge at it (and actually becoming a company with other people on your payroll as employees). Really, as long as you don't screw up and mishandle customer's private data; you shouldn't be at too much risk of legal liability. In your case, it would probably just be for tax purposes if it works out to be better that way.
When I asked my lawyer this question, his advice was that for a one-man shop, incorporating does not significantly affect your liability. If you are negligent, then they can come after you, whether or not you have incorporated. I know this differs from the word on the street. I made him say it several times, because it was not the answer I expected. Where it makes a difference is if you have partners. If your partner is negligent, then a corporation or LLC can shield you. BTW, he did not bill me for that consultation. There is really no excuse for asking a large group of non-lawyers instead of calling one on the phone for a few minutes.
24 people have posted before I did. They all had some input. From a US Legal perspective none of them adressed the real issue.
"When to incorporate?" -- When you need to.
The purpose of a corporation is to create an "entity" (some mistakenly call this "person") that is the true wage earner,
whose assets are the only ones impacted by the acts of the corporation.
If you're a sole practitioner, and every dollar that comes in goes to you, a corporation will not shield your personal assets from anything.
For a sole practitioner to effectively use a corporation you'd need to ...and finally... the expensive part...
- make sure the corporation collects all fees and pays all expenses related to the consulting work AND NOTHING ELSE
- make sure the corporation 1099s you or W-2s you or in some way tax-wise indicates it pays you legal wages, not under-table money transfers
- never comingle coporate resources and your own needs (in other words, no corporate paying your gasoline refill enroute to the customer or your lunch)
Have D&O E&O insurance.
If you're willing to go through all that, a corporation can shield your assets.
For one guy, far cheaper not to be a screwup and not get sued, and not mess with any of that.
The law is pretty clear. If it's a separate entity ("person") then it needs to be separate. If you keep it so, and keep it insured, it will protect you.
E
P.S. All I've said is specific to United States corporation and contract law.
At this stage in your corporate development, assuming you're in a jurisdiction that allows them, you should consider setting up a Limited Liability Corporation (LLC) or possibly an S-Corp. They offer many of the advantages of a corporation (limited liability and a legal entity to hold assets/insurance etc.) as well as a partnership/sole proprietorship (pass through taxation, control). The paperwork is usually very simple depending on your appetite for that sort of a thing (i'm a bad reference for that, i'm a CPA)
If you ever outgrow the LLC/S-Corp, you can do something more complicated and get more lawyers and accountants involved.
I've had a couple businesses where I incorporated right off the bat. Ultimately, it was expensive and the overhead hurt my business. Like you, I am in a consulting business at the moment. Three months into it, I still have not registered the business.
I don't need the overhead, I don't need the liability protection, and I don't need to waste time right now filling out forms and keeping the State happy. I need to focus on keeping my customers happy and making money. If I manage to net $10K or more this year on this side business, then I'll register. Otherwise I would just be making a lot of extra work for myself.
Make sure that your business is going to succeed - because unregistering a corporation is expensive and usually even more time consuming that registering it in the first place.
If you'll be making a lot of money or doing something that could get you sued, get an attorney and an accountant.
I have the hiccups.
If you read slashdot, you know that corporations are evil. So, clearly, the time to incorporate is when you decide to become evil.
Note to ACs: I usually delete AC replies without reading them. If you want to talk to me, log in.
If you are working as a consultant, then the biggest advantage of incorporating will be in tax savings.
In Canada (Ontario specifically) there is a break-even point around $42k/yr income, where the personal income tax and corporate income tax (and accountant fees, etc.) you pay will be approximately equal. Above $42k/yr income, the corporate tax will become less and less compared to personal tax. This is due to the fact that the corporate tax rate is fixed at 16.5% (until $500k or $1M annual income... I can't recall) while personal tax rates have brackets that increase as you make more money.
To take an example from my past, the last year before I incorporated I made roughly $86,000 and paid about $22,000 in personal income taxes. The accountant that helped me incorporate did some calculating, and if I were incorporated, the corp would have had to pay only about $13,000-14,000 in taxes.
There are some costs associated with running a corporation. There are the initial costs of setting it up, usually between $2000-4000 for lawyers and accountants. Then annually, you will probably have an accountant prepare your corporate taxes, which will cost around $750-2000 depending on who does it and how organized your paperwork is. These are extra hassles that some people find unpalatable, and it is a bit of extra administrative work on your part, but altogether, it saves you thousands and is very much worth it. (Unless you have some kind of ADHD and psychologically cannot deal with paperwork.)
Another tax saving tool available in Canada is that you can make $50k/yr in dividend income, tax free. Therefore, if you and your significant other are both part owners in your newly formed corp, then you can essentially have a combined household (personal) income of $100k/yr, tax free because your corp will pay out dividends to its owners, rather than salary (which is all taxable). You will probably not make exactly $100k/yr tax free (but it will still be around $95k or $98k) because in order to take advantage of various tax credits you have to show some personal income. How this is works is that, whenever you need money from your corp, you just withdraw it. At the end of your fiscal year, you and your accountant will figure out how to label those withdrawals, be it dividends, salary, whatever, to maximize the tax savings. That is how I have been doing it in Canada, anyway, and your accountant will be more familiar with how this stuff works in your area.
The best thing you can do (aside from asking the experts on Slashdot, of course) is to go see an accountant who deals with corporate stuff. Explain to him or her what you are thinking about doing and outline your current situation. Using your 2011 net income as an example, they can then draw up a spreadsheet for you, showing what would be your taxes and other numbers if you had been incorporated in 2011. This will let you know with little uncertainty what is your best course of action.
There are other benefits that come with having a corporation, your corp can purchase the equipment (e.g. laptops, mobile devices for testing, etc.) that you will use to do the service that the corporation sells. This can be recorded as an expense of the corp, which reduces the corporate taxes. In contrast if you bought equipment personally, it would not affect your tax situation at all. This is nice if you like toys, and would like some extra reasons to rationalize their purchase.
In summary, if you plan to make more than $42k (*) this year from your moon-lighting activities, just get it done already.
* $42k, or whatever is the break-even number for the tax system you live in.
The details on how to do so vary from state to state, but there is a general guide. You want to form an LLC right now. This is easy to do and cheap. It prevents your personal assets from being seized in the event of bankruptcy or lawsuit against the business.
If you make more than 20K a year, you can save social security taxes by becoming a Sub S corporation. As an LLC, you have to pay 14 percent of all your income to social security. As a Corporation, you can claim a portion of the income as a salary and pay the Social Security tax on it. The rest of your income, you can claim as profit, and not pay the social security taxes, but only pay income tax on it. It's best to have a CPA help you through the transition, though, so there is a tradeoff between the amount saved by the sub S corp, and the amount you have to pay a professional for help.
1) You are hiring employees.
2) You are consistently making $100,000/year or more net, and are in a state where the cost of maintaining a corporation is not burdensome. I'm not going to give legal advice here, consult a CPA and find out how at that level an S corp can save you money on taxes.
You will get many people telling you to incorporate in order to limit your personal liability and protect your assets. That is mostly bullshit--when you are a 1-person corporation it is extremely easy for someone whom your "corporation" harms to "pierce the corporate veil" by, essentially (legal stuff grossly simplified here) showing that you were acting as your individual self rather than as a true corporate officer. However, back to my #1 above, when you have employees, and one of them screws up, then you really do get useful protection.
actually you can and if you do it in some cheap country like Panama it will cost you around $600/year ($50/month) i am sure you could save more in taxes whatever you do than $50/month cost even if you are dirt-poor
Or a trust.
Disadvantages:
up to $2K to incorporate, and up to $2K in accountants fees annually. But that's about it (in Canada). It's a bit of a nuisance in that you've got to spend about 5 hours annually with simple paperwork and phone calls and keeping government records up to date when you move.
So the answer is simple. When you can write-off $10K annually, you'll save yourself the $2K in taxes alone. Between home offices, client meals, car allowances and more, it's all very quickly worthwhile.
People mistakenly believe that incorporation is some sort of "magic wand" that reduces your tax liability and limits legal liability. Unless you meet the VERY STRICT rules for keeping the corporation at an appropriate "arms length" it does none of those things. (And it really doesn't do much for your tax liability even if you do incorporate.) Really, if you are just getting started on your own, insurance is a LOT less of a time sink than incorporation, and time is something any new entrepreneur does not have nearly enough of.
There are other (less expensive) means of doing so than a full blown corporation. But they serve little use for someone just earning an income.
Have gnu, will travel.
When your accountant thinks it's a good idea. Don't have an accountant? Don't think you need one? Then you don't need to be incorporated.
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Corporations are people
In Canada at least, for a revenue stream of $100,000, the small business tax rate is about half the personal tax rate. So if you think that you could perchance use $15,000 or so yourself, instead of giving it to the tax man, then you should incorporate. If however, you think that the federal government will put your money to better use, then don't.
Excuse me, but please get off my Pennisetum Clandestinum, eh!
I guess it depends which country you live in?
The article poster didnt say which country he lives in.
It matters because there are significant differences between countries in corporation tax rates (0% - 35%) and dividend rules, beneficial loan rules and whether it is even allowed at all (some countries have rules to deter of frustrate small one man companies from benefiting from the same company tax regime as larger multi-person companies).
And I suppose also whether you incorporate the company in the same country as you live in is another parameter.
In some countries it makes a lot of sense to incorporate your company in a lower corporation tax company, because then you wont get taxed at all on dividend income if you dont remit it. (Eg if your domicile or local tax rules mean that you do not have to pay tax on foreign income).
The person who said something about limited liability there can be advantages to being incorporated in other jurisdictions on that front also (asset protection).
If you want to get fancy and have enough income to travel and live an expat life-style by personal election, go read up on five flags theory. http://en.wikipedia.org/wiki/Perpetual_traveler (With the caveat that if you have a US passport your first and perhaps insurmountable challenge is to get rid of it or the US IRS will tax you even if you dont live in the US, unlike any other country pretty much.)
This assumes you're in the US, I don't know about elsewhere.
I was a consultant for 9 years. When I set up initially, I had two options: Let the company that contracted me pay me on a W2, handle the taxes, and take a cut for their trouble, or incorporate and let them pay me corp-to-corp.
Many companies will not pay a contractor on a 1099, which is how you pay someone for services if they're not an employee. There are too many potential IRS headaches if the contractor doesn't handle things properly on his end, especially when large sums are involved. It's okay for small amounts on one-time jobs, but there's a big risk that a 1099 contractor could be considered an employee under certain rules, and then all kinds of unexpected problems kick in. So many companies avoid the whole headache by only dealing with corporations. When one corporation pays another, the payer is basically off the hook for tax-reporting responsibility, it all falls on the payee.
I set up an S-corporation, which is a simpler option than many others, although my accountant (who came in late) said I might have been better off with an LLC. In any case, the biggest headache was that I set it up in NJ, which has screwy tax laws for S-corps. I'm still trying to extricate myself from that, and the corp closed over 5 years ago.
So suggestion: If you're going to (or required to) incorporate, do it through an accountant or a registration service, set it up in a corp-friendly state like Delaware and use a registered agent, and find a good CPA to help you through the tax pitfalls. Mine was decent, but endlessly distracted by more lucrative clients, so I ended up paying more in taxes than I needed to, and it took me 5 years to discover that.
A good friend of mine who was in business long before I was avoided incorporating till it was absolutely necessary. What finally convinced him he needed to was when NJ decided to consider his part-time babysitter an employee of his business, and require him to pay unemployment tax for her. At that point he decided splitting his business and personal affairs made sense. YMMV.
ask a good attorney and accountant, not slashdot
Should be asking a lawyer? They can give you a better prepared answer geared to your unique issues?
...income and you want to protect your assets more fully.
Creating a Chapter-S corporation allows you to pay yourself in payroll salary and in distributions - with the caveat that the salary portion must represent a reasonable salary for you work.
This means that you only pay the government payroll taxes on the salary part, not on the distribution (think of the distribution as a profit sharing plan with yourself.) You will pay federal income tax on both, but income tax is all you pay on the distribution portion.
I.e. If your consulting brings in $160k in a year (and ignoring all the costs to you involved) and you give yourself that money, you could pay yourself a salary of $80k a year and pay yourself $80k in distributions. So you pay payroll taxes on 80k and you don't on the other 80k. 80k is a reasonable salary for most types of jobs (in this example - a software engineer.)
Now, IANAL, and I recommend you get a CPA to walk you through the process - they are usually the easiest way to incorporate and get tax advice (plus they usually have nice Excel worksheets that make putting your quarterly taxes aside quite trivial.)
My company's CPA charges $75 per quarter to prepare our quarterly taxes and $250 for the end of year tax preparation, and he gives us lots of advice on how to manage our money, how to structure costs, manage our tax burdens, et cetera. Money well spent until I can actually afford a CFO.
as soon as you have an accountant and a lawyer on a semi regular basis you should have a Company (in fact both of them will suggest same).
Having a company of some sorts also makes it easier to get PAID even if your Cat is the Marketing Director and Your Dog is your Security Director.
i think asking the question is most likely properly answered with "Three days ago would have been smart"
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I did that a while ago.
Before that I workd as "freelancer". That ment a year with a high income led to high taxes. A year with no income had no benefit (well, payed no taxes ofc ...)
Now with my incorporation, the company works as a buffer, safing taxes in the long run.
I'm now no longer "freelancer" but "self employed". My company pays me small wages. So after wages, pension funds and internet/phone bills, the rest teh company makes is profit and taxed. (But to a significantly lower tax rate than above).
From that wages I pay income taxes (in your case you had likely two times wages, once from your original employer and in addition now from your own company).
However: if your company stops app development for a year, and continues paying you, it makes a loss in that year (on top of paying no taxes ofc). That loss, even from several years, is carried into the next year. Your personal taxes from your double income are not affected ofc.
Example: before incorporation I make $100,000 profit like this: // sabatical -> 0 Tax. // only worked half a year -> $6000 Tax
2007: $100000 -> 45,000 tax
2008: $85000 -> 39,000 tax
2009: $0
2100: $35,000
Now my personal income and company is something like this:
2007: $38,000 -> $9,000 Tax / $62,000 -> $19000 Tax
2008: $38,000 -> $9,000 Tax / $47,000 -> $14000 Tax
2009: $38,000 -> $9,000 / -$38,000 no Tax
2010: $38,000 -> $9,000 / (-38,000 from previsous year plus $35,000 earnings this year) - $38,000 wages -> additional $3000 loss -> no taxes
2011: $38,000 -> $9,000 / company starts now with -$41,000 loss.
Well, that is a bit simplified and the numbers are made up, but as a general idea I guess you get it.
You see the total taxes payed is far lower (or in other words, the remaining total money you "own" is much more).
Otoh you have costs to run the company, likely tax counceling, reporting, bookkeeping etc.
You only have to balance, founding costs and running costs of the company versus the buffering effect of the company (saved taxes).
Cost free eBook I read (by iBook/Kobo/Amazon/ObookO/Gutenberg etc.): "The Green Odyssey" by Philip Jose Farmer.
The incentive to incorporate is lessened if you plan on spending all of the cash generated by the business. For then you would have to report all of the income at graduated personal income tax rates.
If you plan to leave cash in the business and not use it personally right away, then incorporating makes much more sense. Here, the amount of combined personal + corporate taxes in the near term would be smaller. The time value of money in the delay of paying taxes works in your favour. What might the business do with its retained earnings? It could invest in assets to grow its own business. It could invest in other businesses.
This depends so much on where you live, what you are doing exactly, and how you will manage yourself, that it's nigh impossible to tell you when the right time is.
For example, due to the minimum investment and minimum operating cost (taxes, notaries, etc), in my country it is currently not considered to be monetarily beneficial to incorporate unless you have a minimum of $150K revenue per year. The minimum investment is being dropped soon, so that makes it *much* easier, but you still have a few K USD per year in basic costs. Find out what the costs are for you, are they worth it ?
For some, even if they have less revenue in a year, it's easily worth it because many liability insurance agencies (at least over here) refuse to insure software development. As such, you have to have the limited liability of incorporating. But if you can get the liability insured, that might be cheaper than incorporating.
There's also the way liability works that differs between areas. Over here, for example, you are still personally liable for everything that happens in the first year of incorporating. And if you mess up significantly (negligence) or "should have known" (f.x. made debts while your income prognoses are dubious), you're still personally liable. The same goes for not having a 100% proper by the book administration, filing your taxes on time, publishing your yearly figures to the chamber of commerce, etc etc. You need to figure out exactly what is needed, and you need to follow those rules to the letter.
Of course, you can put assets in your company. First you need to figure out what assets you can legally put in the company's name (pre income tax spending, huzzah), because if you put something in the company's name that you shouldn't, that might just be tax fraud. You can try to play the system, but as a rule of thumb, don't put anything in the company you don't *need* for work. Again, rules differ depending on where you are at.
You should also be aware that anything you put in the company is subject to being lost. If you put your house on your company's name (can be tricky by itself), you mess up, and somebody comes after your company, you could lose the house.
Do yourself a favor: Consult your chamber of commerce, read up on your local laws (you'll need it), talk to a lawyer and/or accountant. If you're serious about this, spending a few $K USD now to make sure you get it right will save you a lot of grief and money later.
Really if you are going to incorporate and it is just you I would recommend a Subchapter S Corporation.
An LLC is much more expensive to form as it requires publishing in 2 trade publications with the announcement of the formation of the corporation.
A Subchapter S Corp allows you to borrow money from your own corporation without having to pay social security/medicare/etc. if you take it as a dispersement. The other corporations LLC and a tradional Corporation do not allow for this. You will have to file quaterly taxes. Any losses from the business are refected on your personal tax return at the end of the year for income tax. You also will have to keep annual "meeting notes" as well on file even if you are the soul person running it as that is dictated by the SEC.
Traditional corporations have a much higher level of paperwork requirements then an LLC LLP or Subchapter S Corp.
I can tell you from experience any tax paperwork or paperwork that goes to the state or the SEC save yourself headaches and send it certified mail return receipt only. The common excuse heard is "they are not responsible for mail" when you send in paperwork that goes missing.
Additionally each state has their own incorporation laws, you will need to check your local state laws. Delaware for example is vry corporation friendly however if you do not live in Delaware and lived in New York you would have to pay taxes to both Delaware and New York additionally you would need to apply for permits to operate in New York.
Total cost for an LLC with a lawyer is about $2,500.00 Total cost for a Subchapter S Corp with lawyer is about $1,500 - $2,000 because you do not have the added cost of publication.
It depends on a few factors such as the laws and regulations of your state, how much income you're making, etc. It's probably a good idea to hire a CPA. A good CPA can show you the tax advantages to incorporating and help you set up your corporation. In my state, it only costs $10 to start up a corporation, and I was able to outsource the payroll (even if you're the only employee, you're still paying yourself) to a company who would handle all the state and federal taxes and filings for about $60/month (this is worth it because there can be hefty fines if you miss a filing or make a mistake).
It's definitely a good idea if you have the income to justify it.
Proverbs 21:19
After breakfast, certainly.
Please do not read this sig. Thank you.
Thanks you all for your opinions. I definitely will speak with lawyer and accountant friends but it's very helpful to hear about your experiences with the matter. Again thank you very much!
(Disclaimer: IAAL)
As was pointed out earlier, the nature of corporations has changed over the last 10 years. It is high time people start using these changes to their advantage.
I am of the opinion that today anyone with assets should incorporate (full Corp, no LLCs). You would use this as a personal corporation for *all* your assets.....house, cars, most financial instruments, etc. Try to have as little as possible under your christian name and SS number. Not only does this provide a shield from your negligent ass, it protects against many modern ailments too.
Someone wants to ID theft you? Sorry stud I use corporate credit cards.
Want to get cell phones etc? Get them under the corporate banner as a business account.
Does this lead to you personally having little / no personal credit? Yep. So? The Corp has assets and can get credit. Awesome.
As long as you keep the corporate formalities it also makes you damn near judgment proof. Further it provides a way for your assets to remain intact should you die or be incapacitated. And if you live in a state that allows trusts to sit on corporate boards (*cough* Nevada *cough*) then even these contingencies can be accounted for.
*Not legal advice, seek out the advice of a competent adviser etc etc*
This is pretty much exactly what I did, once I figured out my accountant was making me pay two different (supposedly mutually-exclusive) taxes on the same income. You do need to keep an eye on them and make sure they know what you and they are doing.
He charged me something like $800 a year to prepare corp and personal taxes too.
Scenario: I incorporate in the Caymans or Hong Kong or somewhere where ownership information doesn't have to be disclosed to the USA. My bank account and web site are there too. The corporation "hires" me, but otherwise keeps any profit. I pay income tax on my declared income, but have access to the corporation's funds via credit card.
Liabilities? Problems? Legalities? Inquiring minds want to know!
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There is more involved than choosing the type of business format to operate under. Corporations add asset protections for their shareholders, that is true, but only if you actually keep everything separate. Many an individual has been surprised that they are legally liable even though they formed an LLC, Corp S or even a Corp C. Not only do you need to form the corporation, you need to operate it as a separate entity. You cannot commingle assets, so you need separate bank accounts from your personal accounts. You cannot pay personal expenses from your business account nor can you pay business expenses from your personal account (unless traditional reimbursement expenses like mileage, meals, etc.). If you drive a corporate vehicle, you need to track personal mileage and business mileage and you need to pay taxes on the leased value of your personal mileage. If you operate out of your home, you don't get a deduction from your personal taxes for a home office, because it is the corporation operating there. The corporation should be paying rent for the space and you are liable for taxes on the rent paid.
There are many other gotcha's that will remove the protections a corporation provides, so suffice it to say, if one chooses this route, they seek actual legal advice on what they may or may not do. That doesn't mean don't do it. Just do it smartly.
Back in the day, I had a few customers who were afraid of the IRS considering me an employee and when I informed them that I had a corporate entity and would be doing "Corp to corp" billing, it chilled them out a little - because they demanded that I be onsite, for certain hours, using their equipment, etc .... I was a temp employee with a different tax status.
You should have incorporated already. As a contractor, all the code you write is yours. As an employee, all the code you write is theirs, forever. Likewise (as previously stated) anything you value: house, car, underwear, belly lint, etc. is open for suing and grabbing by lawyers of every stripe and description. If you are incorporated, and your business assets include pencils and erasers, then they can sue for all your business has: pencils and erasers.
I recommend incorporation for the tax advantages, not for the lawsuit liability protection. From what I've read, and what my CPA has told me, a lawsuit can make your personal assets just as vulnerable in a single person corporation as they are in a sole prop. The difference is that it's *possible* to make contracts between your corporation and others, rather than you personally. But just because it's possible doesn't mean it's likely -- until you build up some significant business credit rating (e.g. a good D&B report) you're going to have to personally guarantee everything (e.g. lines of credit, business visa, etc.) anyway.
Daniel
Shortly before you discorporate.
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LLCs, as such, are not partnerships (though, for federal tax purposes, an LLC with more than one member can be treated either as a partnership or a corporation and an LLC with exactly one member can be treated either as a corporation or a sole proprietorship.) LPs, LLPs, and LLLPs are partnerships.
Its more common for a narrow range of businesses to be prohibited from being operated as LLCs than the other way around. OTOH, its rather common for LLPs (including LLLPs) to be limited to a certain set of professional corporations. (Its not uncommon for the set of organizations which can be LLPs to be a subset of those that cannot be LLCs, e.g., in California I believe that only certain licensed professions can form LLPs, and those licensed professions are among the businesses that cannot be operated as LLCs.)
Yeah, again, that's true of LLPs (which have partners, and have generally this effect on shielding non-partnership assets of one partner from liabilities incurred by another partner), rather than LLCs.
So are LLCs (for "members" rather than "stock holders"), and LPs, LLPs, and LLLPs (all for "partners" rather than "stock holders"), though which owners are shielded, which liabilities they are shielded from, and the situations in which that shield can be pierced, vary somewhat between the various structures.
Disclaimer: I am not an attorney or tax professional. Use this information at your own risk.
I incorporated in Missouri a couple years ago as an S-Corporation. There are more drawbacks than benefits in my case, so I'm dissolving it. The biggest drawback is the paperwork. It's so easy to let it slide in order to have time for family and getting actual work done. Then it's very easy to get behind on the paperwork. Then it's very easy to find a letter from the IRS saying they're charging you penalty and interest for late filings. If you do only a small amount of contracting, professional fees are going to eat a significant part of your profits.
I want to address one VERY important misconception I've read on this discussion: liability. Incorporating as either the sole shareholder, or as one of a very few shareholders DOES NOT PROTECT YOUR PERSONAL ASSETS IF YOU GET SUED. The more shareholders you have, the greater the corporate shield protects you. Incorporating as the sole shareholder gives you almost the exact same liability as being a sole proprietor.
I found it much easier to just write up a contract disclaiming liability (as one line item), pay a contract attorney to review it and revise it, and then make all customers sign it. That is far more effective at protecting my personal assets than incorporating, and removes 99% of the crap I had to go through while incorporated, and lets me actually get the job done.
I also did my research to make sure I'm not going to fall into the IRS trap of being considered an employee rather than a contractor. You should, too. It's pretty simple, but very important, stuff.
Any well run business has a core team - even if the business has just a single employee. The biggest mistake I see start-ups make is assuming that because they understand the technology, they can do everything themselves. These people quickly become road kill.
If your business is making any profit at all, you should have BOTH an excellent accountant/CPA and an excellent business lawyer. You should ask around - talk to well-established, long-running, highly reputible small businesses in the same general field as yours (or related field). Find out who they are using. Once you identify potential candidates for these 2 team members, either call or visit each of them (but keep it short - remember to respect their time). You'll eventual find good matches for your team. Once you identify them, expect to pay them well for what they do. Do not expect to get their service for free. Do not expect to have hour-long phone calls at no charge.
Has my accountant charged me thousands of dollars? Sure has. And I couldn't be happier! Why? Because what she has charged me pales in comparison to what she has saved me. I hired her 10 years ago when I started my business and I consider it one of the smarter decision I made early on.
The legal structure of your business requires considering many factors - none of which SlashDot can tell you. For me, it turned out that the best structure was a C-Corp - something that was not obvious and went against all the common wisdom of the time. Had I not hired a lawyer to look at this up front, I likely would have made a very expensive mistake. For you, the answer may be different.
Finally, your business need marketing expertise. This can be the hardest and most elusive of all roles to fill. While an accountant and a lawyer can be outsourced and brought in on an "as needed" basis, marketing expertise is generally a 24x7 task. If your business is not driven by marketing, you are already road kill. Good marketers are extraordinarily rare. Thousands claim the title but precious few can really walk the walk. If and when you find the right one, pay them exceptionally well.
Learn to build a team of people you trust to do the job you are paying them for.
Finally, I have a friend - a mentor really - who has been extraordinarily successful during his life. He is retired officially, but spends his days making money for fun. He really doesn't need any more but the chase is in his blood. He laughs at the claim of a "million dollar idea". He says, "Million dollar ideas are a dime a dozen - they are literally everywhere around us all day. By and large, million dollor ideas are worthless. What is exceptionally rare is the million dollar execution..."
An interesting area of tax law is how you handle assets that you take into the corporation.
Let's say you've have a great startup idea, and you've already bought a few laptops for yourself and your crew, a fileserver or two, RAID disks, network gear, dual WAN router, desk, chairs, and other capital expenses.
OK, now when you incorporate, you want to bring that stuff into the corporation, right? So, how is that handled? When the corporation gets stuff, it has to give something in return, right?
Otherwise, it would be a gift, and the taxman doesn't like those, either.
How much depreciation you get? How much depreciation does the corp get?
There's where things get ornery.
I'm not a lawyer, but I play one on the Internet. Blog
If you have a significant other with whom you share income with, you can incorporate, "hire" your significant other, split the earnings (from consulting) in such a way that you both pay taxes in a lower tax bracket.
Not a lawyer here, and I'm Canadian, so take this with a grain of salt.
If you're incorporating in order to shield yourself from liability, you don't protect yourself a whole lot. If you mess up and cause damages then you're going to get sued personally as well as corporately. If you want to protect yourself from that, that's what E&O insurance/etc is for.
The primary goal of changing your corporate structure is to pay less tax. If you're the only owner of a consulting business then I don't think you get much value here unless you're bringing in a lot of income. You'll pay tax as you take money into the corporation and pay tax as it goes from the corporation to you. At least in Canada the rates are figured such that the tax liability is about the same if you earn it through the company or directly. You have some more discretion on the expense side if you do it through a corporation.
My personal experience is that I wrote a SaaS application and did not incorporate. I was acquired by another company and had to incorporate in order to sell everything in a tax advantageous manner. In the end it cost me a lot more to sell the company than if I'd have incorporated. If I were to build another product (not consulting) I would definitely incorporate from the onset.
My first piece of advice would be to talk to an accountant. It'll cost you a few hundred bucks, but it'll be well worth it. I know the US has several options for companies and if you do it the wrong way you're just making it worse on yourself.
A useful question might be: When did Facebook, Google, and other startups incorporate?
Marc Zuckerburg, at one point, was just hacking PHP in his dorm. So, at what point did he incorporate? While still in the dorm? If so, how did he separate the personal and the corporate?
Same for Page & Brin starting out in the Stanford dorms.
And how did that affect the questions we're talking about?
I'm not a lawyer, but I play one on the Internet. Blog
I have been considering myself incorporating or LLCing until I remembered and dug up these following slashdot posts: http://news.slashdot.org/story/10/02/21/1353223/our-low-tech-tax-code http://developers.slashdot.org/story/10/02/25/1949223/independent-programmers-no-win-scenario I also read the linked articles inside these articles. The upshot I get is that independent contracting/consulting is no win scenario in taxes even if you incorporate or LLC yourself. But it seems that writing and selling your own code to an app store is workable. Don't think this tax targeting tech professionals starting and being sole employees of a business has been repealed has it? What am I missing? From your comments, most of you seem to have sole proprietership businesses and be doing fine.
Dude, read the US constitution. One of the responsibilities of the federal government is to establish rules of incorporation.
Corporations have been around for a long, long time.
Because this question IS EXTREMELEY dependent upon circumstances (i.e., a spouse's income, vulnerable assets, exposure, risks involved with work) the better question is, "Who would be a good person to ask about whether I should incorporate?" My answer to that question would be an experienced financial advisor. Not slash dot.
We should learn what we need to know about issues, before we decide what we need to feel about them.
....reading about mobile app development?
Sorry about the mess.
My understanding is that partners are always liable for what other partners do. However incorporation limits that liability to the corporate assets. So what one partner invested into the corporation is always at risk due to the other partner's actions. It is only personal assets that are protected. I believe this is true for LLPs as well.
A corporation can continue to exist after you die. A sole proprietorship ends when you die. If you are only ever going to do consulting work by yourself it might not matter much to you but if you are going to have partners etc it is worth looking into.
Not sure how it would work but I suspect a corporation would also protect your assets should you go through a divorce. If you don't own the business directly you can play some games I think where your salary gets paid after money gets retained by the business. You'd have to split your stake in the business if ordered but at least the business operating costs would get paid before distribution to the two of you, vs wife getting her half of the revenue regardless of the business investments that are needed to grow the company.
The company hiring you will likely require you to meet several conditions, including incorporation, to protect themselves. Remember that guy who flew a plane into an IRS building in Texas a couple years back? His beef with the IRS was a section of tax code which will affect you if you get laid off or quit from your primary job.
Basically, the IRS makes it hard for a company to justify hiring a programmer as an independent consultant. If they hire you like that and the IRS determines that you're actually employed by them, they're liable for the employer's share of all your back taxes even if you've been diligently paying your self employment taxes. (Yes, your employer pays part of your FICA taxes. That's what the "self employment" tax is - when you're self-employed you get to pay both your share and the employer's share of the FICA taxes.) To avoid this possibility, most companies require contracting programmers to be employees of a hiring agency, or self incorporated with multiple sources of income. If you're not employed by someone else, or the consulting you do for them is your only job, the IRS could still find that you're an employee. And they get to pay half of your FICA back taxes.
Right now you're spared from all this because you have another job. But if you should be laid off or quit to concentrate on this contracting work, you will become subject to this section of tax code. HR and Accounting at the company you're working for will want nothing to do with you unless you (A) find another job, or (B) incorporate and have more than one simultaneous consulting gig, or (C) incorporate with another person to form your own 2+ person "hiring agency". (The NYT article is a bit ambiguous - staffing firms are only a problem if they're only acting as job hunter for you. If you're employed by them and they're paying your employment taxes, then it's not a problem.
The relevant terms for you to google if you want to research this more are irs section 1706 530.
Some of the question people ask on Ask Slashdot boggle my mind. I mean, tax advice? Are you kidding?
My advice....incorporate yourself immediately!!
My advice: don't incorporate. The added burden of accounting and paperwork way outstrips the minor benefits of incorporation unless maybe you're making over about $50,000 per year.
First, as other mention, it limits liability for damage and creditors taking your personal possessions.
No, it really doesn't. If you're looking for protection against, say, a lawsuit for selling a defective product, then yes; or if you plan on buying parts on credit, and aren't sure you are going to be able to pay, sure, it's good protection. But you'd said you'd be doing consulting work. It's unlikely that you would encounter any lawsuits of a type that incorporation would protect against.
Second, this is about the ONLY way to keep more of your hard earned tax dollars. YOU can begin to write off all expenses, mileage (keep a logbook in your car to write odometer settings, easy documentation).
Nonsense. File a schedule C; that allows you to deduct all those things on your personal taxes.
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Incorporating is a no brainer. You always want to have some legal padding between you and the job, if possible. Sometimes though, they make you get liability insurance. It can be very expensive.
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When I had my own side business doing computer service and consulting, I never followed through with incorporating (despite hearing many times it was the "thing to do"). Honestly, as a one-man operation, I never really saw the clear value to it, vs. the extra paperwork, higher chance of an IRS tax audit, and up-front expenses to get it done.
Even as a sole proprietorship, you're entitled to quite a few tax advantages simply by having your own business. (And yes, you have to meet a few basic qualifications so the IRS doesn't consider you a hobby instead. That would include keeping proof that you behaved like a legitimate business, including having business cards and receipts for advertising expenses.) But there's no need to incorporate just to write off such things as new computers/printers/monitors/paper/ink/office furniture as business expenses. You can write off postage used to mail out any advertising or marketing materials too (and the cost of the envelopes you purchased to put it in). If you keep mileage records accurately, you can write that percentage of use/depreciation of your vehicle too. And if you designate a portion of your primary residence to your business/office, you get a home office deduction on it as well. (That one can be a pain though, since a lot of people really don't maintain a portion of their place exclusively for business use. If you're ever audited on one of those home office deductions, an IRS agent could very well drop by and ask to inspect the area. Your kid leaving toys on the floor in there or something could pose an unexpected problem....)
Like others said, incorporating seems to only really shield you from one of your CO-WORKERS screwing things up in some manner. As a sole business owner, I can't see how it would protect anything of yours beyond the relatively few items you itemized as 100% used for the business. (If you screwed up and you're the sole proprietor of the business, the person wronged will still go after you regardless... Incorporating might keep them from seizing your office furniture and computers, but they could still get a financial judgement against you that forced you to liquidate assets like your new living room set or flat screen TV to pay it off!)
Yeah, the thing is that payroll taxes stop after about $107,000. So in many professions the difference between a reasonable salary and the top of the payroll tax isn't enough for this to be a good reason to do anything.
"Patriotism is your conviction that this country is superior to all other countries because you were born in it." -- GBS
I did this 5-6 years ago, but prices may have changed.
made an s-corp for $400 with corporate.com
made an llc online with the state for $125. just some button clicks
more accounting responsibility with s-corp. probably need an account. llc is tricky when you have w-2 and 1099 income.
as a contractor i made the s-corp because many contract companies wont work with 1 person llc. too many people have abused the 1099 contracting and treating contractors like employeese that there is risk of an IRS audit. So I made the S-corp. I got alot more tax deductions too. but there is more work.
llc taxes are just like 1099. so if your jsut getting a 1099 doing contracting, just use that. i dont think an llc helps you
whatever you do, dont go pay a lawyer alot of money to make this stuff.they are just stealing your money
As a rule of thumb, you should incorporate as soon as it saves you more money than it costs. That is, counting your additional personal time spent maintaing the corp. as expense, of course.
I presume the rules are simular to Germany where you have to file anual reports and stuff. Maintaining proper bookkeeping for a corp. costs money and/or time. Here in Germany it's freelance (roughly 500€/year of your time and/or money) vs. small business (Gewerbe, roughly 500€ to 800€ per year of your time and money, not counting extra taxes) vs. Ltd. (roughly about 1000€ to 1500€ per year, depending on some details). Founding a GmbH (german Ltd.) costs another 3000€ to begin with and takes a few months, but that's just your typical German burocracy and lawyer-lobby bullshit. If your LLC or something simular is anywhere near the costs in the UK, there's nothing to be worried about in that camp for you.
Generally, if tax savings and the usual legal bookkeeping tricks you can do with the corp are a measurable benefit and make up the cost of maintaining it for sure, then it's time to incorporate. If your business is growing you'll have to do it anyway - might as well start with the learning experience right away. If it's stable in size, then you'll save a few bucks and have a learning experience.
Find out how much bookeeping costs for a corp - it does cost more, because it's more work (Duh.).
Do also look at the laws in place where you live and only make the switch when you're sure you have a graps of things even if the bookkeeper screws it up for you. It's your ass on the line if they pin you down for fraud or something simular just because you missed a due-date for a report or something, so do some research of your local laws before incorporating.
Other than that, if you can move around income and revenue and save taxes and shit and there's a safe bet that you'll end up cheaper in the end, go for corp.
My 2 cents.
We suffer more in our imagination than in reality. - Seneca
The principal advantage of incorporating is the protection of your personal assets from liabilities incurred by the work you do. One of the most basic requirements of maintaining this "corporate veil" as it is called is to maintain completely separate financial records, not commingle personal and business funds or property, and have a separate, distinct place that is for exclusive use of your business. This CAN be a home office, but that is not recommended, because it is all to easy to borrow a stapler from your home office, which would technically violate separation and allow a suing counsel to pierce your corporate veil, exposing all of your personal assets and holdings to liability.
Either operate as a sole proprietor and get a business insurance policy that is larger than a few times the value of your gross assets plus all future income, or incorporate and establish a real business BEFORE you do any work for your client or accept payment in fee for service (and get a smaller liability insurance policy that will be more affordable).
Unions are corporations, and they then shouldn't be able to petition the government.
The basic problem here is that corporations are made of people, and people have rights. So you're telling a group of people that as soon as they get together for a common purpose, they suddenly lose those rights. Let's say a group of like-minded people want to get together for a cause, let's say against eating kittens. They decide to incorporate to make things easier concerning their pooled money in a bank account, etc. But now, under your rule, they can't use that money to run ads against a politician who advocates eating kittens.
Probably not going to pass an audit if you are going to tell the IRS that IT employees make $38K a year. Try documenting that with some professional society survey and the like. The IRS will use their own numbers for salaries if you cant give convincing documentation.
And that paperwork isn't that bad....again, have a CPA to help/do it for you.
To each his own, but anyone I've worked with in IT contracting....they found the "S" corp is the best way, and it keeps you from being doubled taxed like a regular C corp does...ESPECIALLY if you are a one man operation. The S corp. allows it to come through on your personal taxes.
Light travels faster than sound. This is why some people appear bright until you hear them speak.........
Taking lots of business-related deductions on a schedule-c supposedly makes you more likely to get audited. However, your earnings & deductions under a corporate tax return are small relative to the universe of corporate returns making an audit highly unlikely. So bottom line - if you plan on taking business deductions, go the corporate route. You can probably save enough going the s-corp route by taking some of your comp in dividends to pay for the "accountant" person doing your corporate tax return & quarterly stuff. Look for small business accountants who are not CPAs - you'll get the same work done and pay less. You really don't need a CPA when you're small. Call around and tell them your expected revenues and that you'll want them to prepare "all the quarterlies" and the corporate tax return. You can do your own personal taxes by dropping the k-1 income from the corp onto your 1040. My guess is that you could find someone to do that for about $500/yr.
He's not.
I hate grammar Nazi's.
If citizens have rights when acting individually, why should those rights disappear when they act collectively?
Because there is no analog for, say, the death penalty.
Ultimately, a corporation is a legal entity used to streamline taxes, and provide an equitable means of shared ownership for larger than a handful of people. It is not a person, as it doesn't shit, fuck, eat or (most importantly) die.
Having things that are given the rights without any of the downsides is a sure way to put an exploit into the workings of our economy and government. I could easily relate half the things wrong in our country with our over-corporatized, limited liability behemoths who (aside from that pesky regulation) pretty much steamroll over the citizenry (the other half are due to side-effects of basic human nature) and pay their costs - someone in the organization having been tasked with the cost/benefit and realizing the benefits of steamrolling the public outweigh the costs.
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Incorporating costs virtually nothing, and you can benefit from it immediately. Hell, I wrote off nothing but expenses for the first 3-4 years with virtually NO income coming in....
You don't have to worry much about the paper work till serious money starts coming in.
Light travels faster than sound. This is why some people appear bright until you hear them speak.........
If you're doing work for anyone you don't trust 110%, you want to be incorporated or have some other type of limited liability. Otherwise, they can sue you and put all of your personal assets in jeopardy. Incorporating is incredibly simple (at least here in Florida). You just fill out the online form with the state, pay them about $100, register with the IRS and you're done. Put everything in the company's name, if you sign any contracts, make sure the corporation's name appears next to your signature. Do all your business related banking in a separate account in the corporation's name.
The only real difference is you need to keep business and personal finances separate, and you'll have to file a tax return for the corporation. An accountant can help you with this.
My accountant told me that you should incorporate when you can see a savings on your income from taking dividends versus payroll. For example if you make $30K a year from this gig, then you can pay yourself a decent salary, say $17.5K and then you can take the rest as dividends at a lower tax rate. My accountant suggested the break even point is usually $20K for people, since there are costs and time associated with doing payroll, etc. Liability is also a cosideration