Released On 02-09-2007
So, I was reading all around the Liability and Legality section of Earners Forum, and it struck me that a lot of the people posting in that area didn’t know much about Corporations, LLC’s, partnerships, and more, and the ones that did know things weren’t posting much help. So I decided to compile the little I know to help out some people.
Anyways, there are only 3 key steps in forming your own entity, and they are:
So, there are four main ways to go about with your business, and those are Sole Propietorship, Partnership, S or C Corporation, and LLC. The first two, Propietorship and Partnership I won’t even discuss in this guide, for one key fact: They don’t limit your liability whatsoever. If you get in trouble and someone sues you, all of your personal assets are at risk. So I won’t even waste my time talking about those.
Here are a couple key facts regarding Corporations and LLC’s:
Corporation – one or more owner business where the owners need company funded benefits as well as liability protection. It is a separate legal entity. You can save taxes through income splitting (google it). You can raise capital by selling stock of your corporation. The key disadvantage to a corporation are the administrative duties, and if you decide to get a corporation I strongly recommend you purchase a book to help you manage it. Corporations are also double taxed, but you can get around that if you just pay all of the companies profits to your salary.
LLC – one or more owner business where owners want to be taxed as partnership but want to have limited liability. It also is a separate legal entity, but it is a pass-through entity, meaning that the money it makes you will show up on your personal tax return. Its main disadvantage is that you don’t want a pass-through entity if you’re making a lot of money and no real losses. It has a few administrative duties as well, but it’s a lot more lenient than a corporation.
So, what do you pick? Well – I decided to go with LLC for my businesses first two years, until I’m 18 and can be the CEO of my corporation. That wasn’t the main reason I went LLC though – I’m sure that during my businesses first two years I will only have losses, and having a pass-through entity means that my business’s expenses (like a new computer, laptop, camera, monitor, etc) go on my personal tax return, meaning I won’t have to pay as much, if any, taxes on any money I made working. Two years from now, I’ll stop spending as much money on my business and will turn out with large profits, at which point I no longer want to be a pass-through entity, and I will change to a C-Corporation.
Anyways, stay tuned for a couple more guides I’m going to write regarding this, because I’ve just read tons of books and articles and hope that I can help a few people out here.
Comment By Will.Spencer
posted on 03-07-2007 at 07:50 PM
| Corporations are also double taxed, but you can get around that if you just pay all of the companies profits to your salary. |
Comment By Nocturnal
posted on 03-07-2007 at 09:32 PM
As far as claiming certain items such as new computer, camera, etc, for business, does that work if you work out of your house or do you have to have an actual office in order to qualify for all those tax deductions?
Comment By Will.Spencer
posted on 03-07-2007 at 09:40 PM
The tax laws apply whether you have a seperate office or not.
In fact, if your office is at your home you can deduct part of your mortgage or rent and part of your utility bills from your income taxes.
Comment By Moelman
posted on 03-07-2007 at 11:26 PM
Is it worth it to establish myself a business if I'm not earning a whole lot?
Also, what is the difference between S and C corps?
Comment By posterscorner
posted on 03-08-2007 at 03:28 AM
Nice article.
Don't forget to file those tax forms with the state government depending on state tax laws even if you have no income to report.
Comment By Will.Spencer
posted on 03-08-2007 at 06:11 AM
|
Originally Posted by Moelman
Also, what is the difference between S and C corps?
|
Comment By ddiger
posted on 03-08-2007 at 06:22 AM
If you don't have an accountant I advise you go find one..
Don't use Uncle Fred anymore? A good accountant will advise you
which kind of Corporation to create. They know laws better then
the law makers & they know what you can deduct & what you can't.
Depend on the size of your business, expect to pay at least $500 /year
just for your Corporation Taxes to be filed the right way. You'll sleep a whole
lot better knowing your accountants name is on the bottom of those returns,
then Uncle Freds...Trust Me
Comment By Moelman
posted on 03-08-2007 at 08:56 AM
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Originally Posted by Will.Spencer
|
h34r:Comment By Nocturnal
posted on 03-08-2007 at 08:20 PM
@Will.Spencer
In regards to deducting rent and utilities, does all of that need to be under my business name? What happens if I'm a sole proprieter? I would like to read up on this. Do you have any other resources that I can browse?
Comment By aLpHaSuRf
posted on 03-09-2007 at 06:57 AM
I used to work on wall street for over 6 years in the stock market. I am not a CPA but from my personal knowledge from my experience from taking the series 7 test and 64 to become a licensed Stock broker. I had to learn the tax ramafacations and tax shelters for all types of stocks, bonds, corporations, DPP's, Realestate.... ETC
In my personal opinion one of the best ways to set up a company would be to set up a DPP(Direct Participation Program) or a LLP(Limited Liability Partneship). The LPP differs from a LLC(Limited Liabilty Corporation) in many ways. LP's are usually formed as a tax shelter. I am not going to get into the differences between the LLP & LLC. First I will say the cost to set up a LLP is usually more costly than fee's to set up a Corporation. The reasons being the LLP is a much more benefial way to set up a company. However the LLP may not be suitable or appropriate for everyone looking to form a company.
The corporate tax bracket if I am not mistaken is 36% maybe even higher. If you elect to be classified as a small business corporation(S election) you do get tax benefit as well as avoid getting double taxed!
The LLP does not fall into the corporate tax bracket due to the fact it is not a corporation, it is a participation program. The thing that makes the LLP beneficial to form over any Corp is that first and fore most the partnership has no set tax bracket. It benefits from the flow thru tax treatment. Which means any and all income after operational costs will be taxed at the partners OI(Ordinary Income) tax bracket. So your tax bracket would be your Ordinary Income bracket, that is one of the biggest benefits. The other benefit in my eyes is that the way the partnership is formed you have GP's(General Partners) and you can have unlimited SP'S(Sponsoring Partners). The role of the GP or GP's is to over see the daily duties & operations as well as make all business decisions for the LLP. The GP's do get a salary and a GP can also be a SP. The SP's are merely investors in the program they have no say in the future of the company or how the company is run. They get a percent of the profits after the deductions of operational and salary costs. The total liability for the SP's is the amount of the original invesment to become a SP and a partner in the program.
I can go on and write a book as to why I think the LP or DP is the best way to go. So I will leave off saying this. If you are looking to form a company do your due diligence. Definatley look into forming a DP or LP it might be worth your time.
Comment By LuckyGrams
posted on 03-11-2007 at 11:07 PM
|
Originally Posted by Will.Spencer
The tax laws apply whether you have a seperate office or not.
In fact, if your office is at your home you can deduct part of your mortgage or rent and part of your utility bills from your income taxes. |
Comment By clslaw
posted on 09-23-2007 at 04:14 AM
Hmmm. Deciding upon a business entity structure based upon the posts on a public forum is dubious at best. There are many choices and the ramifications are not always easily undone.
I have already seen incorrect statements on this thread about both structure and tax consequences. Be careful, folks....
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Comment By jacob
posted on 03-07-2007 at 07:48 PM
I haven't been here long but get the gist that this website is geared not just to a US market so you might want to qualify what markets this applies to.