Hello, I am currently starting my Web Consulting business which I have been operating but I am now going to turn it into a real business. I am currently wondering what exactly I need. I was thinking an LLC to protect me and also to have creditability, but I am curious about Taxes and what exactly I have to document. How do sales online work as well, because I'm under the impression that there are limited taxes online. I am also wondering about which kind of liability forms I would need as I do no want to be taken to court or come into legal problems if possible. I was also looking alittle bit and see LLC's can be expensive, is an LLC the best route to start off at or what? Should I consult a lawyer, or just do more research? If anyone could help me with this it would be greatly appreciated. Thanks.
Believe it or not, what you are doing right now could be considered a business (in the United States at least). When you do things by yourself, using your own social security number for taxes, that is called a sole proprietorship. You can continue doing things this way, and when it comes to filing taxes you just list your expenses and revenue on Schedule C. Very easy. Okay, now you are starting to think about the bigger picture. Perhaps your client list has grown, or more income is starting to come in, and you don't want to lose it all to a frivolous lawsuit. Your idea to form a business entity called a limited liability company (LLC) is a good move. That way you can replace your social security number with the LLC tax ID number for taxes. You'll need that tax ID number to open a bank account for the LLC or to hire employees. If someone is not happy with your work and they try to sue your company, they will only be able to reach into the assets of the LLC, not you personally. So that's the good news, the LLC provides a first layer of protection, the so-called "liability" level of protection. But the bad news is, the lawyers out there know this, and they will name you personally in their lawsuit. So now you have to defend the LLC and yourself individually in a court of law. Very expensive. You need to look into what it takes to properly run the LLC as something completely separate from you as a person. Different address, bank account, telephone, stationary, and all of the required annual reports and payments. The LLC is something you create with the state, not the federal government. So you need to look up the Secretary of State website for the state where the LLC will be operating its business. I know you hear about Delaware and Wyoming and all that, but my experience has been that you would do well to start with your own home state, then grow from there. From my perspective, it depends on how you are doing the sales. I do a lot of affiliate sales so the actual sale and collection of sales tax is taken care of by the parent company. But if you are selling products you created or services you performed, then it makes sense to collect sales tax for the state where you deliver these items. You know how some order forms say "for residents of California add 7% sales tax" so I think your situation would be similar. Best to look this up and confirm what you are supposed to do. Internet sales taxes has been a hot topic lately, so I'm sure the laws are different in each state. We live in a society that loves to sue each other, so it might be impossible to fully prevent legal action being taken against you. Consider a formal business entity, purchasing liability insurance policies, funding your own legal defense fund, putting an attorney on retainer, hiring or outsourcing your own legal team, etc. Another entire universe you might want to explore is called asset protection and estate planning. Just make sure what you decide on is legit and not a scam. Seek professional help. Oh it can be expensive unless you try to do a few things yourself. Check out NOLO and their legal books that talk about how to form your own LLC and submit the filing to the Secretary of State and the IRS. The catch is that you will still need an official registered agent in the state where your LLC was created. That can certainly be you, at your home address. But you have to actually be available during business hours to accept legal service papers. Others just hire a registered agent service for this purpose or they use their attorney or CPA. That's what I did, I used my CPA to form my LLC and assigned him as the registered agent. It's a good arrangement because I come back to him throughout the year for tax questions and tax preparation. My cost was a $600 package to file the paperwork, get a tax ID number, assign a registered agent, elect the LLC to be taxed as S Corp, and get a fancy corporate binder that I use to hold my paperwork. It includes a company seal, certificates, articles of organization, corporate resolutions, and other goodies. It stays next to the binder I got from my business checking account so everything is in one spot for easy access. But your cost could be $75 if you cut out a few things and did the filing yourself, or it could be a couple of thousand dollars depending on who you hire to file the paperwork for you. I felt comfortable using someone I trust and someone I continue to have a business relationship with (for taxes and other questions). I didn't go to a lawyer, but that is certainly an option. I've had a hard time finding lawyers who are affordable because they all seem to work for $500/hr or $300/hr. You might have better luck than me, who knows? I would say yes to the research part. Go to your public library, or check out the IRS website section about small business. http://www.irs.gov/businesses/small/index.html There is a ton of free info out there. You just have to look. When you are ready to move forward, I suggest that you consult with a professional, just to make sure you haven't forgotten something. I'm sure other people will chime in. The main concept is that you are aware of your options. Don't forget that the law seems to change each year, so have to do your own research to keep informed. It's a constant battle to stay ahead of the game with meeting legal requirements and having current business licenses and doing your taxes correctly. Good luck.
Thank you, I didn't except that much input, I am very grateful! I am going to do a bit more research, If I do use my own social security number, Do I just document all my profits and pay taxes on them? Or is the profit just my income? And I'm going to be doing some contracting, so is that even a good route to take? I want to make this the most affordable thing to do, I do not have a big budget, and want everything legit.
You report all your income and expenses. You only pay tax on the taxable amount after you deduct expenses. You will want to carefully document all your business related expenses and income. If you are making any real money, then you might want to consult with an accountant.
Hmm, I'm really not sure what route to take now. This all seems pretty confusing. What is the best bet? Hmm..
You report all your income and expenses whether you are an individual or an LLC. The tax requirements do not change in terms of what you must report. There is not much additional work to operate as an LLC.
It may not seem like it but there are hidden pitfalls, such as state franchise taxes for operating as an LLC.
I guess I don't consider writing one $800 a check a year too much extra work. (There are not "franchise taxes". In California the Franchise Tax Board is the authority which collects both personal and corporate taxes. There are minimum taxes on an LLC, but other than that I am not sure where you think all the extra work or complication comes in when operating an LLC) I don't really find filling out the one-page statement of information each year really that daunting either. What exactly are all these hidden pitfalls that make an LLC so much more work to operate?
$800 is the minimum franchise tax. It is based on a sliding scale based on gross income as opposed to net income. So if you eventually grow your business past being a small LLC your franchise taxes increase. I'm just saying its hot a complete easy answer fill out a form and LLC is your magic best answer. There are many other considerations a novice wouldnt think of, for example perhaps you grow your business and your personal income tax bracket is in the top bracket if you are a C corp you can pay the lower corporate tax rate and delay paying person income tax until you distribute. (time value of money concept). P.S. browntwn's analysis is overall correct and informative... however my point is the small nuances that laypersons are not trained to contemplate and can't be covered in broad overarching statements
I agree, which is why you will never see my telling someone an LLC, or any other form of business entity, is the way to go based on a couple lines in a forum post. I did say, and I think it is true, that operating a business as an LLC does not add much of a burden in terms of additional work for the business owner. That is really the point behind the creation of the LLC.