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?"

Comments

As soon as you have anything to take

[Anonymous Coward]

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)

Re:As soon as you have anything to take

[QuantumRiff]

From my experience, an LLC is used for partnerships. In some states, only certain professionals can even form LLC's. Often they are for protecting the partners from each other.. (ie, accountant partner screws up.. Lawsuit can hurt the partner, but they can't go after the assets of the other partners, if they were not involved)

Corporations are a way to shield owners (stock holders) from liability. (You can sue Bill Gates, when MS screws up, just because he's a stock-holder)

Re:As soon as you have anything to take

[QuantumRiff]

>Corporations are a way to shield owners (stock holders) from liability. (You can sue Bill Gates, when MS screws up, just because he's a stock-holder)

Why no edit button Slashdot? that should be you can NOT sue Bill Gates....

Re:As soon as you have anything to take

[Anonymous Coward]

I believe you're confusing LLC's with LLP's. LLC's are general purpose vehicles for just this sort of scenarios. LLP's are designed for the unique constraints of Architechture, Law, Medical and similar **licensed** professions; and as such, limit who can form. Straight "partnerships" on the other hand (meaning not LLP) can be formed without any paperwork at all, by simple agreeing to try to sell/make stuff with another person.

Re:As soon as you have anything to take

[F34nor]

This is what is so wrong with the US. Corporations were originally granted limited liability for investors in return for limited rights. Now that the 14th amendment has granted "human rights" to "property" corporations have both limited liability and human rights giving them in fact more rights than humans. This is why Romney saying "corporations are people my friend" is so dangerous. If corporations want to petition government the executives can spend their considerable income to do it, the employees can spend their merger income to do it and the investors can liquidate some stock and spend their money to do it but the corporation itself petitioning government would be as abhorrent to the founders as tax free churches telling people how to vote.

Re:As soon as you have anything to take

[ShanghaiBill]

Hire a competent attorney.

NO! This is terrible advice. The attorney will cost you thousands of $ and steer you toward the most expensive option. This just isn't that complicated.

The choice is simple: If you expect to ever seek VC funding or have an IPO then form a Delaware C Corp. Otherwise form an S Corp in the state where you reside and/or do the majority of your business. There are plenty of websites where you can do this online for a few hundred bucks. I use www.businessfilings.com for all my domestic corporations, but there are probably other sites just as good.

Re:As soon as you have anything to take

[lord_mike]

That is an incorrect assumption. Being a shareholder does indemnify you from most lawsuits, but the board of directors can be personally liable as well as the corporate officers. If you are a small business as an s-corp, you will still be personally on the hook for most things. The only real protection that incorporation offers is liability from your investors. Investors have little to no recourse if you lose all their money. You are not shielded from other forms of liability, such as personal injury or negligence. You can still be sued directly along with the corporation you own, since you would be the presiding officer and CEO. Protection from creditors is mixed. While you may be protected from personal action if you stiff a supplier, the bank may require you to be personally responsible for any loan to your company as a condition of credit.

You should confer with an attorney before incorporating any business. The few hundred dollars in consultation fee is worth doing it right.

Re:As soon as you have anything to take

[Aquitaine]

Sure, but that was also before tort and the idea of 'full liability' were in place. Prior to the LLC, big businesses could shield their investors and owners but small businesses had a hard time doing so - the LLC was a way to equalize that protection.

Enough people with enough resources will always find a way to protect themselves. If you got rid of LLCs, that wouldn't change - but your average wannabe entrepreneur would have a lot harder time of things because he hasn't got access to all the lawyers and accountants you'd need to achieve limited liability without an easy legal avenue.

You don't have to know a lot about corporate law to realize why it makes sense. The most you risk when you change jobs is your new salary (in the event that your new job sucks, you get laid off, or your employer goes under). Entrepreneurs gamble a lot more to get off the ground (like savings or loans from family and friends) so their risk is already quite a lot higher -- enable their customers or investors to repossess their houses and cars and you'll just have fewer people starting businesses and cede more of the market to bigger corporations.

Re:As soon as you have anything to take

[DragonWriter]

Sure, but that was also before tort and the idea of 'full liability' were in place.

Both tort and full liability existed long -- as in many centuries -- before corporate liability shields were created (in 1855); and even longer before the special corporate-like but tax-neutral-and-more-flexible-in-organization US LLCs were created (in 1977).

Prior to the LLC, big businesses could shield their investors and owners but small businesses had a hard time doing so - the LLC was a way to equalize that protection.

No, it isn't. The primary motivation for creating the was to create a low-ceremony (unlike a corporation), liability-shielded, flexible structure for members (often, themselves corporations rather than individuals) with the resources to craft their own management agreements rather than relying on the default rules applicable to corporations. Private corporations are a more common small-business structure, LLCs are more often big business structures (often, subsidiaries of or joint ventures between big corporations) than tools of small business.

You don't have to know a lot about corporate law to realize why it makes sense.

Knowing a lot about corporate law is probably detrimental to finding the argument you make sensible.

The most you risk when you change jobs is your new salary (in the event that your new job sucks, you get laid off, or your employer goes under).

This is false. In addition to reviewing the concept of opportunity cost, I suggest you consider the situation of the risks associated with workplace safety.

Re:As soon as you have anything to take

[cayenne8]

Be honest. Whether corporations are good or bad, people were running businesses way before limited liability was put in place.

Yes, but this is today...and you need to play things smart within the current system that exists!!

My advice....incorporate yourself immediately!!

First, as other mention, it limits liability for damage and creditors taking your personal possessions.

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).

Also, and I'd recommend this...look into setting up a subchapter "S" corp. This will allow you to keep more of your money from being sucked up into SS and medicare taxes (employment taxation).

Get a CPA...to make sure you file correctly and on time. You figure out what you bill for the year, and out of that pay yourself (according to the IRS) a 'reasonable' salary. Out of that portion, you pay employment taxes...the rest falls through to personal income at EOY, and you only have to pay state/federal taxes on that.

Example...say you bill $100K a year. You could pay yourself a reasonable salary of $40K. So, you will have to pay SS and medicare on that $40K....along with state and federal (taken out of payroll like normal). But at EOY, you only have to pay state and federal on the remaining $60K. This can be significant.

Also, look into setting up a HSA (Health Savings Account) for yourself....and load it up pre-tax for routine medical spending. You can qualify to get one of these by signing up for a higher deductible insurance policy...for catastrophic only needs (used to be termed Major Medical).

Get with a bank and they will help you set up the HSA...this is not a use it or lose it...it grows annually, and if you want you can also invest some or all of this fund to make money for you. If it remains when you retire, you can convert this money to retirement funds. I found this was a great tool, and frankly, I wish the feds would promote this rather than try more and more to hinder it as it was done some with the recent Obama care bill.

That aside....yes, it is extra paper work, but once you get into the swing of it, not that difficult, when you start to see the $$ saving abilities it gives you. You do NOT have to cheat....this is legal, and available to you.

Get a CPA to work with (their fees are deductible too)...keep it legal and reasonable. Also, I'd recommend getting a copy of Quickbooks. This makes it easy to track your billing, income, outgo.....and at EOY, you can send it to your CPA to make it fairly quick and painless. If a good CPA that handles small businesses...they can help put you in contact with people in case you need liability insurance...one of my contract required I have this and I was put in touch with people that got me the min of what I needed and helped me do just enough to get set up and working.

I paid a lawyer about $250 years back and gave them a name. In 2 weeks, I had all the registrations and all I needed with the state and was a registered business. You can do it yourself....different difficulties in different states. Heck, look into the incorporating in Delaware like others do...not sure the exact benefits doing it there...but there are some.

Put a little thought and research into the start of it...and once you learn a few steps (quarterly filings with feds and state if over a certain amount for salary paid)...it becomes second nature.

It is a PITA that the govt does require so many hoops to jump through...yet they claim to want to make it easier on small businesses (large corps pay whole departments to do this fiscal stuff and permits, etc), but it can be done by the individual. And in the end, it is worth. it.

If for nothing else...to keep as much of your hard earned money as you can for yourself. It is worth it.

Probably Not Worth It

[Anonymous Coward]

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.

As soon as possible ....

[Anonymous Coward]

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....

Taxes

[headhot]

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.

Re:Taxes

[Anonymous Coward]

S corp you have to pay yourself a salary, it's not as good as it looks on the surface. Just do an LLC, get general liability and you're good.

And you don't need an accountant to do an S Corp either. All the tax packages can do a 1120S for you pretty easily. However, you don't "start" as an S-Corp, you start as a C-Corp and have to file an S-Corp election with the IRS.

Do you really know anything you're trying to comment about OP?

Re:Taxes

[DJ Jones]

Filing as an LLC is much easier depending on what US state you are in. LLC's were designed for this. I own several of them. I recommend filing in Delaware. It's very easy and you get charged a flat tax of $250 a year. If you do business in your own state you still have to pay state tax there but for me, I run an internet business and have no office or servers in my own state so one could argue I only need to pay taxes in Delaware.

There are two major benefits to incorporating as I see it, 1) it allows you to write off expenses against your earnings on your taxes 2) it allows you to protect your personal assets. Now, you could just file your taxes as a DBA with a schedule C without incorporating which would allow you to write off expenses without the corporation but without a corporation, if you get sued, they could come after your house, your car, your savings accounts. It's almost an insurance policy. That and it gives you a little more legitimacy with the IRS and other businesses.

To answer the original post: if you are making enough money to pay $250 a year in tax for a corporation, you should probably file for incorporation.

Seek advice (not from slashdot)

[killmenow]

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.

Generally, Yes

[Greyfox]

Having a corporation confers a lot of tax advantages. My first boss, 23 years ago now, was the owner of the business and he treated that thing like a piggy bank. Which, really, it was. If he could get away with the company owning a resource (like his cars) he'd do that. So a lot of his daily expenses were paid for by the company. That meant, among other things, he didn't pay income taxes on the income that paid for his cars. There are also tricks to structure at least some of your income to be taxed at a lower rate.

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.

A legal answer

[gavron]

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
- 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) ...and finally... the expensive part...
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.

Yes

[SupplyMission]

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.

Re:Say what you mean...

[onkelonkel]

He's _implying_ that it is not related to his regular employment. Need to be pedantic.