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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?"
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'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.
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.
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.
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.