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How do you know when to Incorporate, and, is it necessary?
saikyo

5+ Year Member



 
Msg#: 4995 posted 10:41 pm on Apr 3, 2006 (gmt 0)

Hello all,

I'm considering starting a web business, and was wondering when I should think about incorporating as an official company.

Is this necessary at the beginning?

I'm not sure at what time most people consider to legally estabilish their company.

Any advice from personal experience in this area would be appreciated!

- Harvey

 

Webwork

WebmasterWorld Administrator webwork us a WebmasterWorld Top Contributor of All Time 10+ Year Member



 
Msg#: 4995 posted 12:12 am on Apr 4, 2006 (gmt 0)

It might be helpful for you to state why you think incorporating is a good idea.

Often, the reasons people assume that incorporation justify incorporating, don't apply.

For example, if you're a 1 man/woman shop - you do everything yourself - then you and the corporation will get sued if you do something wrong. More often than not insurance is better approach to concerns about liability.

Also, you need to talk to a tax advisor. Not all corporations are created equally. You might do just as well to stay a sole proprietorship.

Probably best to get all your facts together and seek out professional guidance. Consider the advice an insurance policy, money well worth spending.

minnapple

WebmasterWorld Senior Member 10+ Year Member



 
Msg#: 4995 posted 1:04 am on Apr 4, 2006 (gmt 0)

My accountant and lawyer suggested that I become a LLC [ Limited Liabilty Company].

This is suppose to add some layer of protection to your personal assets if someone sues your business.

However, from what I have been told, there are no bullet proof vests.

Insurance for developers is hard to get. Most insurance companies do not want to deal with it.

If anyone know's someone that accepts these types of policies, please let me know in private. [ sticky ]

lorax

WebmasterWorld Administrator lorax us a WebmasterWorld Top Contributor of All Time 10+ Year Member



 
Msg#: 4995 posted 1:31 am on Apr 4, 2006 (gmt 0)

I opted to incorporate as sub-chapter S. Primary reason was for liability and to create several dba businesses under one umbrella organization. I also plan to dominate my market space so adding INC to the end of my biz name just comes with the territory. ;)

Morgenhund

10+ Year Member



 
Msg#: 4995 posted 12:27 pm on Apr 4, 2006 (gmt 0)

We started without company, just to test concept. After about a year, we decided to incorporate. The number of orders skyrocketed 500% in same month.

I assume a lot of people was reluctant to pay to an "unknown entity", and company registrered raised our credibility instantly.

jsinger

WebmasterWorld Senior Member 10+ Year Member



 
Msg#: 4995 posted 12:53 pm on Apr 4, 2006 (gmt 0)

We started without company, just to test concept. After about a year, we decided to incorporate. The number of orders skyrocketed 500% in same month.
I assume a lot of people was reluctant to pay to an "unknown entity", and company registrered raised our credibility instantly

Ridiculous post. As soon as you have a business, you have a "company" even if it isn't a corporation.

We are a long established brick/mortar corporation. We don't mention our business form nor do we affix "Incorporated" to our name...ever. Few of the worlds' largest firms do either. Do TV ads mention "Coca Cola Incorporated?" Do you watch "NBC Incorporated?" Or do you know more about advertising than they do?

Never had one customer ask about our business structure or say, "gee if you were only incorporated, I'd buy from you."

luckychucky

10+ Year Member



 
Msg#: 4995 posted 1:39 pm on Apr 4, 2006 (gmt 0)

500% in same month
...yeah. Uh huh. Because you appended "Inc." at the end of your company name. I'll concur: ridiculous post.
lorax

WebmasterWorld Administrator lorax us a WebmasterWorld Top Contributor of All Time 10+ Year Member



 
Msg#: 4995 posted 2:45 pm on Apr 4, 2006 (gmt 0)

While it may be hard to directly correlate a 500% increase with incorporation there is definately some truth to the credibility factor that morgenhund mentions. Depending upon your product or service, knowing if a company is a sole proprieter, LLC, or corporation has weight with a potential customer. It does with me at least.

jsinger

WebmasterWorld Senior Member 10+ Year Member



 
Msg#: 4995 posted 3:20 pm on Apr 4, 2006 (gmt 0)

Yes, if your site says something like "we're just a tiny kitchen table fly by night operation run by a grandma part time" then changing the name to "International Widgets Incorporated" would surely help.

But I doubt that simply changing the name from Widgets.com to WidgetsIncorporated.com is going to do much especially if your operation otherwise exudes a small-time look and feel.

-----------
Most of us here use many devices to engender trustworthiness that are far more effective. Anyone can be a corporation and most customers know that. We do a lot of our sales B2B where most sellers are corps and no one is impressed by it.

Frankly, waiving "inc" around (which I have seen done) shows me the operation is little and is trying way too hard to look big and important.

When you're REALLY huge and important, a brief name, say IBM, NBC, or GM, works nicely.

LifeinAsia

WebmasterWorld Administrator lifeinasia us a WebmasterWorld Top Contributor of All Time 5+ Year Member



 
Msg#: 4995 posted 3:31 pm on Apr 4, 2006 (gmt 0)

Never had one customer ask about our business structure or say, "gee if you were only incorporated, I'd buy from you."

Be lucky you're in the business that you are, because many businesses DO have structure bias. In some industries, it's all but impossible to get credit card processing unless you're a corp.

There's also the trust factor, especially if you're solely on the Internet. Coca Cola, NBC, and other big names already have the brand name. But Small Company, Inc. doesn't.

jsinger

WebmasterWorld Senior Member 10+ Year Member



 
Msg#: 4995 posted 4:56 pm on Apr 4, 2006 (gmt 0)

Be lucky you're in the business that you are, because many businesses DO have structure bias. In some industries, it's all but impossible to get credit card processing unless you're a corp.

Can anyone vouch for that statement? If you are a corp I bet many processors want the owners to sign personally for any liability. But I don't know for sure.

saikyo

5+ Year Member



 
Msg#: 4995 posted 10:59 pm on Apr 4, 2006 (gmt 0)

So it sounds like the benefits of incorporating are..

1 legal protection
2 brand improvement
3 access to services, such as visa

But, when it comes to a business just getting started, with a business model that isn't even proven to work, and no customers, it's unnecessary to incorporate right at the beginning.

Could someone point me to a site explaining what it takes to incorporate? I'm interested to know the cost or amount of documents etc that would be required.

Thanks!

oldpro

5+ Year Member



 
Msg#: 4995 posted 1:19 am on Apr 5, 2006 (gmt 0)

May I add...

The primary reasons to incorporate are:

1. Level of pre-tax profits...once a certain threshold is met, there are tax advantages to consider.
2. Potential product liability issues.
3. The ability to bring in additional shareholders to raise capital. Stock is a tangible asset to the corporation.
4. Depending on the financial stability of your corporation, stock may also be used as collaterial to leverage debt (bank loans)

To the above poster...rather than pointing you to a website for pointers, you would be better served to make an appointment with an attorney and cpa to discuss your specific situation.

jsinger

WebmasterWorld Senior Member 10+ Year Member



 
Msg#: 4995 posted 2:31 pm on Apr 5, 2006 (gmt 0)

"there are tax advantages to consider"

But remember that while corps can pay a lower tax rate, there are still personal taxes to pay when the money is taken out. That only works well when you want to retain earnings within the corporation to expand.

Generally there are more tax disadvantages than advantages (in the U.S.) to incorporating.

Funny how so many unsophisticated people imagine all sorts of tax benefits to having a corp. Yeah, maybe there were in 1950 when personal rates could reach 94%. But not anymore. Have your corp join a country club or pay for "business" trips to Hawaii, and you're asking for 20 years of IRS audits. :)

oldpro

5+ Year Member



 
Msg#: 4995 posted 5:22 pm on Apr 5, 2006 (gmt 0)

there are still personal taxes to pay when the money is taken out.

I guess I am speaking of this from a USA perspective. With that said, the tax advantages on the personal side pertains to active vs. passive income. Active income (personal income taxes) are taxed an additional 15.3% (social security & medicare). Passive income (dividends paid to you by the corporation) is not subject to the additional 15.3%. Of course you cannot pay yourself $100 per week and $500,000 in annual dividends, otherwise you will be paid a friendly visit by an IRS agent. This division of income has to be reasonable to not raise "red flags on your tax return. However, there could come a time where you are able to hire enough personnel to where you have very little to do with the business and pay yourself 100% in dividends.

Funny how so many unsophisticated people imagine all sorts of tax benefits to having a corp.

I respectively beg to differ...

I qualified that statement by stating once a certain income threshold has been met. With pre-tax income levels above $250,000 per year there are significate advantages. In the 100,000 to 150,000 range are a few advantages that outweigh whatever disadvantages come along with it. If you are making $100,000 and below there are way more disadvantage than advantages to consider.

jsinger

WebmasterWorld Senior Member 10+ Year Member



 
Msg#: 4995 posted 6:22 pm on Apr 5, 2006 (gmt 0)

Yeah, I forgot about the new lower tax on corp dividends. I believe that has a sunset provision.

In fact, for the first time ever, I paid myself a div last year. Not tax deductible by the corp, by the way. I paid the div on top of my normal salary that I've paid myself for several years. So it should be okay with the IRS. In previous years, I would have probably taken the extra cash as a fully taxible
year-end bonus, I guess.

m2c1r

10+ Year Member



 
Msg#: 4995 posted 6:50 pm on Apr 5, 2006 (gmt 0)

I agree with oldpro in two respects. One, once you have gotten into the six figure range of earnings, there are definitely many more advantages to being a corp than not.

And two, until you hit that point, and especially when you are just starting out, you have much more important things to worry about than incorporating, such as generating sales.

New business owners, in my opinion, spend way too much time worrying about the wrong issues, such as business structure, the potential of getting sued, benefits, and lots of other admin type stuff.

The first and only thing you should be doing is working hard to prove that whatever business you are trying to launch is selling something people will pay more for than what it costs you to get it to them.

Once you have more cash coming in than going out, and it looks like a winner, then you can go back and tidy up this other stuff, which isn't a big deal when you have some cash and a working business, but is expensive and often ends up being a waste of time if you don't.

LifeinAsia

WebmasterWorld Administrator lifeinasia us a WebmasterWorld Top Contributor of All Time 5+ Year Member



 
Msg#: 4995 posted 7:46 pm on Apr 5, 2006 (gmt 0)

Have your corp join a country club or pay for "business" trips to Hawaii, and you're asking for 20 years of IRS audits. :)

True, but the corp can pay for your health insurance and medical costs. Much better for the corp to get the 100% deduction instead of trying to deduct it on the persoanl side- have to itemize and then you still only get to deduct past medical expenses in excess of 7.5% of your adjusted gross income.

jsinger

WebmasterWorld Senior Member 10+ Year Member



 
Msg#: 4995 posted 1:37 am on Apr 6, 2006 (gmt 0)

The problem with a corp paying the bosses health insurance is that plans can't discriminate. I decided it was cheaper to pay my own personally than to include a whole bunch of parttimers who really didn't care about it anyway.

The riskiest thing a small business can do it become a socialist state for it employees...Ask GM or France.

Glad you mentioned it. That's an issue I need to revisit.

LifeinAsia

WebmasterWorld Administrator lifeinasia us a WebmasterWorld Top Contributor of All Time 5+ Year Member



 
Msg#: 4995 posted 3:47 pm on Apr 6, 2006 (gmt 0)

The problem with a corp paying the bosses health insurance is that plans can't discriminate. I decided it was cheaper to pay my own personally than to include a whole bunch of parttimers who really didn't care about it anyway.

Yes, I didn't qualify that. I meant to specify that in the situation where you don't have any employees, it's much better to have the corp pay health insurance/medical expenses.

Also, most plans will allow you to specify that the insurance is only for full-time employees (or specify a min. number of hours worked per week or year) or employees with the company for a minimum amount of time. I do remember some legislation somewhere (don't remember if it was state or Fed level) requiring the same health beneifts for part-timers as well (but I think they had to work at least 30 hours/week?).

jsinger

WebmasterWorld Senior Member 10+ Year Member



 
Msg#: 4995 posted 5:16 pm on Apr 6, 2006 (gmt 0)

You can discriminate in benefits against part time employees the last I knew. I believe employees can be classified in other ways such as management and non-management. I thought about offering insurance to all management with 5 years of tenure.

Risk I envision is an employee without health insurance becoming ill and suing you claiming he should have been insured for some reason (maybe close to the line on hours between full and part time).

----
One of the most dangeous things for a new business with an inexperienced owner is to sit down with their lawyer, accountant AND INSURANCE AGENT at the outset so that the business is saddled with a cafeteria plan of costly fringe benefits certain to doom the enterprise from Day One.

oldpro

5+ Year Member



 
Msg#: 4995 posted 7:41 pm on Apr 6, 2006 (gmt 0)

One of the most dangeous things for a new business with an inexperienced owner is to sit down with their lawyer, accountant AND INSURANCE AGENT at the outset so that the business is saddled with a cafeteria plan of costly fringe benefits certain to doom the enterprise from Day One.

Totally agree with you jsinger...

I believe we have given the original poster enough food for thought. Right now he/she should not worry about incorporating. Needs to get a year or two under his belt, start making money and around a six figure income then consider incorporation. A trusted attorney and cpa can be of tremendous help, but he/she needs to fully research the subjects to know when he/she is getting bad advice which only benefits the attorney or cpa.

As far as cafeteria insurance plans...

It is better to do a high deductable health savings account for you personally as the business owner. HSA deposits are tax exempt. Offering health insurance benefits to employees are not cost effective until you have 15 to 20 employees. We have enough employees to make it feasible, but surprisingly very few wanted to opt in...so I nixed the idea.

oldpro

5+ Year Member



 
Msg#: 4995 posted 7:48 pm on Apr 6, 2006 (gmt 0)

Yeah, I forgot about the new lower tax on corp dividends. I believe that has a sunset provision.

I believe you are thinking of "C" Corps...which there is a sunset provision. "S" Corps have always considered dividends passive income (similar to rental income), which is exempt from social security and medicare taxes.

jsinger

WebmasterWorld Senior Member 10+ Year Member



 
Msg#: 4995 posted 10:19 pm on Apr 6, 2006 (gmt 0)

We have enough employees to make [health insurance]feasible, but surprisingly very few wanted to opt in.

We have a lot of women who are covered by their husbands policy. Kids, too, who are still on their family insurance.

Yes, I was referring to C corps.

I incorporated from Day One but I did the work myself. I remember doing the budget for my new business and trying to figure out how long I could survive on baloney sandwiches, three meals a day. I've known others who began a new business by first buying a Mercedes as the company car (That company went BK about three years later)

Comment about insurance agent reminds me of the ancient adage: never ask a barber whether you need a haircut.

Morgenhund

10+ Year Member



 
Msg#: 4995 posted 10:16 am on Apr 11, 2006 (gmt 0)

...yeah. Uh huh. Because you appended "Inc." at the end of your company name. I'll concur: ridiculous post.

Well... You might consider it ridiculous, but this is just because you have another background.

Before we incorporate, we get regular reuests like "what a hell you are? I cannot find 'Mybluewidgets' in the database of registered companies: are you fraudsters or what?"

In our market, it is pretty common practice to check out company's identity against publicly available state-owned database of registered companies.

They checked it; found nothing; went away.

When we incorporated, situation changed immediately.

In addition, many of our clients [now] are busineses and state organizations, who did not want to deal with individual sellers, either.

cayleyv

10+ Year Member



 
Msg#: 4995 posted 2:34 am on Apr 26, 2006 (gmt 0)

im facing a similar dilemma - whether to incorporate or just get insurance. please PM me if you have resources for small biz insurance.

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