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Corporation? LLC? Incorporated? Sole-Proprieter? rrghhh

Whats the difference between all the various types of businesses?



10:27 pm on Jan 27, 2003 (gmt 0)

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I started a web hosting business about a month ago. I'm making money from it. Now I'm getting advice from everywhere, people telling to get incorporated, corporated, LLC'd, stay a sole proprieter, etc.

What is the difference between all of these? Which is appropriate for a webmaster? I understand that the specifics vary from state to state, but in a nutshell what does each choice offer me, legally as well as financially? Do I need to declare that I am one of these immediately, or is there a certian amount of money I have to make before I am required to do so? It's not like I have employees... it's just me, running this "business" from out of my own place. When does my basement hobby turn into a business with reportable income?

Also, I have not registered my company name in any way yet. Is this a must? Or can I wait until I'm earning enough money that I need to declare my income?

A lot to ask, I know, but I'm not making enough to hire a lawyer or an accountant yet... you guys are all I've got. Thanks for any helpful advice anyone throw my way.

12:19 am on Jan 28, 2003 (gmt 0)

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Firstly, as you mentioned, you need to talk to your accountant* (or equivalent professional) to get specific advice for your personal needs and your state requirements.

Having said that, you will need to register your business. This is simply a legal registration saying MrMee also is using the name "xyz" to trade under.

Under this simple sole-trader structure, all income gets lumped together with any other income/salary (like having 2 jobs -- except you can claim on business expenses).

To incorporate as a company (limited or unlimited) means you wish to create a separate legal entity (called the xyz company) which will be be treated separately from you re incomes/taxes etc. This can have benefits like spliting income, being able to raise finance easier and, if you are a proprietary LIMITED company, limiting your liability if anything goes wrong.

The draw back to creating a separate legal entity is you have to bring other people in (directors) to steer the company and take responsiblity for anything that goes wrong. This means following legal rules, having meetings and producing paperwork to prove all is OK.

The idea of incorporating (coming together to create a "body") is designed for a group of people to be able to co-create and operate a single venture. The exact form of incorporation will depend on what type of legal entity you wish to create: business, non-profit, professional organisation etc. and the benefits/risks you are willing to take.

This doesn't sound where you are at the moment so you would most likely need to simply register your business under a sole trader structure.

Good Luck

*the above is provided as a guide only and doesn't constitute professional legal advise. Any resemblance to persons living or dead is entirely coincidental and the author advises that, if the pain persists, you should see your doctor. (that should cover any legal issues :))

4:34 pm on Jan 28, 2003 (gmt 0)

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Welcome MrMee.

Most of us probably started as you have.

Depending upon how large and legal you want to become will determine exactly what steps you need to take. It has nothing (well, almost) to do with how much you are making.

For starters, as a one person business (sole proprietor), if you wanted to use a business name instead of your personal name ("XYZ Website Design" instead of Joe Smith), in most cases you would go to your local county courthouse clerks office and fill out a "dba" (doing business as) form, pay them a small fee, and you are set. They will also check to make sure the name you want isn't already in use locally.

Also, as a business (even a sole proprietor) declaring your income "can" have tax benefits. Most new businesses have costs which actually can offset income and possibly provide a tax advantage depending upon your individual situation (your mileage may vary). It (sole proprietorship) simply invloves filling out and including Schedule C with your income tax return (in the US, anyway). It's not very complicated, really. Just keep good records and follow the instructions (and rules).

[Disclaimer - I am not a lawyer. The above is provided as a guide only and does not constitute professional legal advise. If you need professional advice, consult an attorney and/or accountant. Keep out of reach of children. Chew before swallowing. Contents may be HOT. Put your right foot in, put your right foot out... Etc., etc.]

7:38 pm on Jan 28, 2003 (gmt 0)

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OK, here's another take. First:

Which is appropriate for a webmaster?

There is absolutely not a reliable and accurate answer to that. No matter what business you're in, webmaster or not, which type of business entity to form, if any, depends on your individual financial and tax situation, liability concerns and long-term goals. There is no way to be sure you're making the right choice other than either doing plenty of research and evaluation or accepting the advice of a qualified expert who himself has a good understanding of your situation.

About some of the choices: a sole proprietorship, as has been said, will mean you'll report the income and expenses incurred in the operation of your business on a Schedule C, carry the profit to your 1040 (you won't be able to use a 1040C or 1040EZ) and be taxed there. There is no new legal entity; the business is you and you are the business.

Incorporation (there is no difference between, as you put it, "incorporation" and "corporation) creates a separate legal entity that will have its own legal and tax responsibilities. Of course, as a shareholder and officer of that corporation you will still have personal responsibilities and liabilities. In it's basic form, a "C" corporation, that corporation will file its own tax returns. Any money you pay yourself as salary, consulting fees, dividends, or any other distribution will have to be accounted for on your own return.

Most likely your corporation could elect to be classified as an "S" corporation, which would mean that the income and tax liability pass through to you. The corporation has to file a form, but has no tax liability.

An LLC is a construct of the individual states, and isn't recognized as a business entity type by the IRS. By default it would be treated as a partnership, which again would mean the tax liability passes to you (and any other "members" of the LLC). But an LLC can elect to be treated as any other kind of entity by making a filing; so some LLC's members choose to be taxed in the same way as a "C" corporation.

Again, which is best for you is impossible to say without knowing more... each has its advantages and disadvantages. But it can probably be said that the LLC form has become very popular for small businesses owned by one or two people. In the interim, though, there's not likely to be any harm in remaining a sole proprietorship, re-evaluating when the business is stable and after you've had time to give the options careful consideration.

[Oh, and we're all doing disclaimers? OK: I am not a lawyer, but I played one in the senior play.]

8:00 pm on Jan 28, 2003 (gmt 0)

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I deal in C-Corps, S-Corps, LLCs, Partnerships, even 501s. Of all of them, I like S-Corps and LLCs the best.

>I'm making money from it

Sit down w/ a good CPA and ask him to explain the advantages of an S-Corp when it comes to distributions and self-employment taxes.

8:39 pm on Jan 28, 2003 (gmt 0)

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I operate an incorporation service and perhaps I can shed some light on this topic.

While organizing your business as a corporation or limited liability company is often discussed in light of tax benefits, there is another major advantage to doing business as a corporation or LLC--liability protection.

The liability protection a corporation or LLC will provide you depend on the state or country in which it is organized. In Nevada, where we are located, Directors, Officers and Shareholders of corporations are provided with very good liability protection, and can't be held liable for corporate debts unless they committed some sort of fraud (the preceding is not a legal opinion).

Also, the number of Directors and Officers needed will vary from state to state and country to country. Some states require a minimum of three Directors and three Officers, and others require only one person who can fill all offices.

The one point I want to get across: it is very dangerous in our society to do business as a sole proprietor (even more dangerous as a general partnership). Sole Proprietors have ZERO liability protection, which means if someone sues your sole proprietorship, you could lose everything you own to pay off the judgement. In our sue-happy world, it just makes sense to limit your liability by incorporating.

Tax-wise, it also makes sense if your CPA can guide you into making wise business decisions regarding salaries, dividends, S-corporation status, etc.

I'm not an attorney or CPA... the above is not meant to be legal or professional advice. If you feel you need legal or professional advice, the advice or an attorney or qualified professional should be sought.


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