At what point do you form a legal entity?

I am at the point that I will have to file taxes on website income. In the past I made websites and did reseller hosting for individuals but now that I am in the affiliate/adsense game they issue 1099s.

At what point is it advantageous to become a legal entity? Can you get the same benefits from sole proprietorship?

Does anyone have a link to a non-forum that details the benefits?

I am most interested in tax issues but I also don't want to be sued for possible copyright issues and whatnot.

Thanks

 

this is definitely a question best left to an accountant. if you plan on earning any kind of significant revenue, believe me-its worth it.

my accountant showed me that it was advantageous to form an s-corporation (also called a small business corporation.) having a corporation allows you to take 49% of your income as non-taxed "distribution" and 51% payroll. you then pay 25% self employment tax on total revenue earned.

the distribution option is not available to sole proprietors, thus the whole "double taxation" concept comes into play. you're taxed on what you earn as though drawing payroll AND you are taxed for self employment.

regardless of how you choose to file you should probably form an LLC. you can do so rather easily using "LLC Maker" which costs about $60.

http://www.nolo.com/product.cfm/ObjectID/749AB100-5AFD-479C-A637A296A830F6E2/111/

with an LLC, you can still file as a sole proprietor, or a partnership, or a corporation. the flexibility you have with an LLC in my opinion makes it a no-brainer.

but regardless, you should see an accountant before making any big decisions.

 

Hopefully I will bump into an accountant in the next week! I am not making a killing but at the current rate I will make over 20k this year online.

I don't want to give large amounts to the government but I am old enough to know that Uncle Sam will get his share either way! So I would rather do it without penalties and interest if you know what I mean!

I guess I will have to get some professional advise then.

Thanks

 

Talk to a CPA. The previous post is not accurate. A corporation can pay dividends, which are exempt from self-employment tax - however, you are still responsible for paying tax on the dividend. There is no double income taxation with an S corp. While incorporating can exempt some of your income from self-employment tax, there is no such thing as an acceptable percentage of dividend vs. salary. The IRS says you must pay yourself a market rate salary for the work you perform. Paying yourself a small salary and the rest in a dividend (to avoid SS tax) is one of the key things the IRS uses to flag a return for an audit. With $20K a year in profit, and say you paid yourself $10K in salary and $10K in a dividend would save you 15.3% on $10K or $1,530 - however, you would also have the added expense of forming the corporation, annual registered agent, keeping minutes, corporate bank account fees, additional accounting expenses (a CPA is going to charge you more for preparing and filing a return) in addition to increasing your risk of an audit. You might not wind up saving very much, if any money, with 20K in earnings. Your CPA might also not advise paying any dividend with $20K in earnings.

A corporate does give some asset protection, but an llc would be another option (although it doesn't offer the option of a dividend).

 

the information i provided was accurate for ME. i was not telling you what to do other than see an accountant.

note that there is a difference between your company as a "legal" entity verses a "tax" entity. if you form an LLC (not very difficult) you can choose to file as a sole proprietor, a partnership, an s-corp or a c-corp. you can also change from year to year.

 

In my experience it is not easy to find a compatible accountant with whom you can work well. Your income seems large enough to start looking so that by the time you grow into larger numbers you will be ready.

 

Do you have to do anything to be a sole proprietorship? And is there any actual benefit in that?

I really appreciate all the comments thus far.

 

For me in the US it's a matter of filing a Schedule C on Federal Taxes (TurboTax home & business includes this). I also had to get a local business license and get a sales tax ID from the state.