Is LLC the way to go?
So I'm looking for guidance here from people who have already started a business in Texas. Small print: Let me preface with the understanding that yes, I realize I should seek legal counsel first, and nobody's comments here will be misconstrued as legal advice.
I'm looking at incorporating door64 for my own protection. From what I am hearing and reading, it looks like an LLC is the way to go for me, providing both for separate taxes and liability protection. I'm interested in hearing from others who have taken this road already. What were the reasons you chose (LLC, LLP, etc.)? Any guidance for me as I go down this path for the first time? Should the various services be used to handle the paperwork, or is it fairly straight forward to do on your own?
I'd also like to use this same entity for any potential consulting income. Is there anything about an LLC that would preclude me from doing so?
Thanks,
Matt
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Hi, Matt: I'm set up as an
Hi, Matt:
I'm set up as an LLC. It's easier to administer than an S-Corp and you don't have to jump through as many hoops. If you haven't already, you should get a copy of this book and read through it. It will help you decide which way to go: http://www.amazon.com/dp/007147868X?tag=valdostaorg&camp=14573&creative=...
Constance
Q Factor Consulting, LLC
Matt, you should contact
Matt, you should contact someone at ATI or the SBDC for input. For myself, I'd stay away from an "S" but then again...{Insert Sgt. Schultz}
Thanks much, you both. I'll
Thanks much, you both. I'll take a look at the book, Constance.
I looked at the options...
I looked at the options... especially personal consulting but also for web based business. LLC looked to be the most flexible; clear winner. But just for me, right ;~)
William W. (Woody) Williams
Senior Project Manager
Software Development, PMO, IT Governance
door64 Blog
enweave
Matt, I recently started
Matt,
I recently started Gemba Network as an LLC after a lot of research - here is a quick summary of what I found :
1) If one chooses to organize a business based on their name (i.e. Joe Smith) or as a "dba" [doing business as] (i.e. Joe Smith Carpentry), then there is not any legal consideration for the person being separate from the business. Thus, if any lawsuit arises, there is little to no protection aside from any personal liability insurance.
2) The simplest method to create a business entity (i.e. separate from personal liability) is the LLC. It has pass through tax advantages of other forms, without the complexities of registration, filing taxes, and ongoing maintenance (Legal and Tax accounting) fees. One can do own this as an individual (i.e. self employed) or as an entity with employees) - lots of flexibility on this.
3) Other forms of the Corporation (s-Corp, c-Corp) provide other benefits once the company is a sizable organization (i.e. more than 20 employees), but the initial costs and maintenance costs can be considerable.
4) Conversions between the types of Corporations are possible (i.e. time and money).
BTW: I chose to use Bizfilings.com for registration (there are other services such as LegalZoom that may offer the right package for you) and I have heard of individuals that walk the papers through the right agencies that could save even more money. Note that I do not receive any financial incentive to mention the above organizations.
Hope that this is helpful for you and others. Enjoy !
Best regards,
Andrew Cahoon
p.s. The above information should not be considered legal or tax advice, since I do not have qualifications to provide this - please refer to a professional for your unique situation. My intention was to share what I have learned.
*It depends* on what you
*It depends* on what you intend to do.
Certainly your best bet is to consult an attorney; I recommend Darin Siefkes, whom I have consulted on many occasions. He offers breadth of knowledge suited to small business, charges by the hour, offers discounts to clients that put him on retainer, has given me sound advice, and has been very generous to me with his time. I would guess that he would probably give you good free advice, and charge around $200-300 if you want documents.
I would guess that you'd be best off with an LLC, but see above.
FYI:
I have run several sole proprietorships. Door64 is probably already considered one of these by the IRS (especially if you file Form 1040 Schedule C), even though I'm guessing that you haven't done the requisite fictitious name filing. (Generally you won't need to do this only if your surname appears as part of the business name.) Note that the term "doing business as" can also apply to corporations, and that it does not denote a type of business entity.
My current business is a Texas corporation, and I have made the election under IRS subchapter S to make it a "flow-through" organization for tax purposes. (An "S corp." may have 0-79 owners, and must generally not own nor be owned by other entities.) Filing requirements in Texas are minimal. I think it cost only $300 to get started, and no franchise tax is due in years that revenue is under $300,000.
Hope this helps
- John
Just as a follow-up, I found
Just as a follow-up, I found this article on the topic:
http://www.startupcompanylawyer.com/2009/03/12/what-type-of-entity-shoul...
Another thing I found was
Another thing I found was this hidden paragraph in the Nolo documents I got for my LLC setup:
A Flat Corporate Tax Rate Applies to
Certain Professional Service LLCs That
Elect Corporate Tax Treatment
If your LLC elects corporate tax treatment
and provides professional services in the
fields of health, law, engineering, architecture,
accounting, actuarial science, performing arts,
or consulting, a flat federal corporate income
tax rate of 35% applies to all its net taxable
income, not the lower graduated corporate
income tax rates of 15% and 25% that apply to
most corporations.
So basically it doesn’t matter if I choose to be taxed as a corporation or individual because I pay 35% taxes either way as a consultant.
Constance
Q Factor Consulting, LLC
If you make that election,
If you make that election, Constance, I believe that you'll pay tax twice on the same money. So, your effective rate goes up to 42.25%.
My S corp works pretty well for consulting/contracting practice: it's been keeping my effective tax rate below 20% of gross revenue.
- John
Check out this timely
Check out this timely article about lawsuit liability with an LLC:
http://www.litigationandtrial.com/2009/05/articles/the-law/for-people/ca...
The short version is that an LLC does NOT protect you from being sued.
Sometimes people hear the "limited liability" part of "LLC" and think that means they can't be sued - not true.
For the type of litigation
For the type of litigation referenced in the linked article, no one is immune. However, litigants tend to file these kinds of suits against the entity (company, personal) with the money. If the corporation holds the financial resources, they sue the corporation. If an individual has the assets, they sue the individual.
Liability insurance is the only recourse for most of us against this type of action. Most of us have some liability insurance included with our homeowners policy but that won't cover the business side of our lives. A separate policy like that mentioned previously is a good idea.
However, it's worth noting that because of the way these suits are filed (following the money), the person with professional liability insurance will get the lawsuit every time in the absence of assets elsewhere. On the plus side, the insurance company may help investigate and, perhaps, defend you.
It is also worth noting that if there are little or no assets, a lawsuit of this type is highly unlikely.
For most of us, this kind of insurance is very inexpensive. What low premiums indicates is that the situation does not occur often in our profession -- Therefore the cost (risk) is low. There are other occupations where that is not the case. Check with your doctor, for example.
In addition to filing and administrative costs, tax liabilities, investor liabilities, and personal liabilities to consider, there is another. Some organizations require that consultants have a legal business (aka "corp-to-corp") before they contract with them. There are a variety of reasons for the requirement but one is that liability "passes through" to the consultant.
A lot to think about... this is the point where legal counsel starts to look like a really good option.
Not a legal eagle,
William W. (Woody) Williams
Senior Project Manager
Software Development, PMO, IT Governance
door64 Blog
enweave
LinkedIn
True, I was required by one
True, I was required by one of my contractors to purchase the general liability coverage.
Constance
Q Factor Consulting, LLC
You may not be a legal
You may not be a legal eagle, but you are a "smart bird" nonetheless.
Note that I didn't write "old coot" ('cause that's me).
Agreed - nothing really
Agreed - nothing really protects you from being sued. Hartford provides a great $2M business insurance policy. Mine cost $350 annually. I highly recommend them.
We live in a litigious
We live in a litigious society. For the most part, consultants don't have a lot of liability unless their advise leads the client to a legal liabiilty of its own.
An "S" corp. give no protection. A "C" corp. costs too much to maintain, especially if there is limited income.
I am not a lawyer, but I'd go LLC (as I have in my own consulting company).
I must respectfully disagree
I must respectfully disagree with you, Jay.
The difference between "S" and "C" corporations is an election in how they are treated by the IRS: the "S" refers to the election under subchapter S of the Internal Revenue Code, and the "C" refers to subchapter "C". The "S" election may be taken in or after the second year of operation, so all corporations start out as "C" corp's. The "S" election allows owners of those corporations (myself included) from being taxed twice on the same revenue. (One of my degrees is in tax accounting; I've studied this in depth...)
The State of Texas makes no distinction between "S" and "C" corp's. Other than the initial filing fee, the state doesn't charge me a thing to operate my "S" corp. (when I keep annual revenue under $300K), and the annual reporting requirements are pretty minimal.
Some clients require corp-to-corp relationships for their service vendors (many also require at least $2MM in errors and omissions insurance); for others, my corp. offers convenience.
Having a corporation doesn't make me immune from legal trouble, but it does offer a layer of protection. In my case, that $300 was well spent.
- John
Can't debate your experience
Can't debate your experience John. Is it at all possible that Texas corporation law is different from other states like NY?
It's not only possible, but
It's not only possible, but likely that TX and NY laws differ.
I find TX very accommodating toward businesspeople (though often apparently to the detriment of consumers and the public at large). Do you find NY's laws very different?
- John
Honestly, I don't remember.
Honestly, I don't remember. For everyday I'm in Texas, I forget at least two days from my NY life.
I always thought that there was a difference between "S" and "C" when it came to liability. Your experience and studies tell me that I am wrong. No problem fo rme admitting that I have to change my opinion.
However, as a generalization, I think that government needs to stay out of my way and stop regulating.
From a liability
From a liability perspective, a corporation is a corporation: both "S" and "C" corp's are entities under the law. (The word "corporation" comes from the Latin "corpus", meaning "body", and "corporatio", meaning "assumption of a body"; so, legally, the entity becomes "embodied" upon incorporation.)
I agree with your point of view, but tend to lean toward wanting more balance between the government getting its hands off the affairs of the governed and the government protecting segments of the population from the others: basically a balance between suppliers and consumers. I would love to have each business, industry, or class of industry carry its own weight, with no net money going into or out of the government (e.g. football teams must pay for their own stadiums, airlines pay for airports, importers paying for all port security costs, etc.); one of my biggest peeves is that our government effectively taxes the income of people who build things in this country and uses that money to effectively subsidize the importation of goods that will put them out of jobs (not to mention poison our children and landfills).
- John
The liability protections
The liability protections afforded through corporations (various) are primarily for investors (stock holders), not directors, officers or employees. In other words, shareholders are not liable for the bad decisions of a corporation -- their risk is limited to losing their investment. For directors, officers and employees, that is not the case as both criminal prosecution and civil suits are a risk although the risk is usually different for directors and officers than for employees.
On the civil side, personal liability insurance is the contingency. On the criminal side, the recourse is competent attorneys and sympathetic juries ;~)
William W. (Woody) Williams
Senior Project Manager
Software Development, PMO, IT Governance
door64 Blog
enweave
LinkedI