Setting up a Business- LLC, Inc, etc

[Jotaru]

So the job I currently have pays us (as sales reps) as outside contractors; basically, we work on full commission, and they pay us as such. I discussed the options briefly with someone today as far as setting up an LLC or some other entity, but I'm a pretty big business noob, so figured I'd try to amass some information on the topic.

From my understanding, setting up an LLC is a pretty cheap way to keep taxes down, and potentially set myself up for the future, if I wanted to open a business or do something similar... what I'm wondering is, if anyone has some experience doing anything like that, potential costs associated, legal issues, so on and so forth.

I'll be sitting down with a family friend tonight who owns and operates his own business, and my parents as well, but they run their family business as a DBA (Does Business As) so its slightly different- there's also a lawyer I know who I can hopefully sit down and discuss things with as well, but I just wanted to try to get some preliminary information as far as what can be expected. I work with a good buddy of mine who has been wanting to start up a graphic / visual arts company for a while now, and this may be his opportunity (as it would give him a reason to start an LLC, could list me as an employee, setup cell service as a business line, save on taxes, etc) so we're interested in a joint venture.

Thanks in advance for any info-

[guartz]

You can incorporate online for rather cheaply in most states. 100 bucks or so. The only tax benefit I know of, is that you can claim some personal expenses as businesses expenses. (Car, home office) etc.

Another one is you can take out business credit cards on your business (in some cases, without personal liability, depends how long you've been in business, profits, etc)

[Jotaru]

I lurv quick replies, especially when I'm lurking on the board and can come back and post moar infos.

Basically we were looking at it as an option of averting some taxes- you can expense a lot of things. Mileage, cell bills, computers, so on and so forth, we'd be able to write off, which is a huge plus. Additionally, it'd mean smaller benefits such as the credit cards you mentioned as well as, like I stated, cell service, which means no hefty security deposit for myself when I decide to port over (currently I have not-so-great credit, so I'd have a huge deposit, but were it his LLC, or with myself as a partnership, it'd be a different amount, as well as discounts on the plan itself.. and then a tax break for it being a 'company expense'.

I didn't think about the credit card thing, that's good info. Do request moar! Thanks

[guartz]

You have to be careful with the tax thing. If you incorporate yourself, you pay yourself from the business account. Which means you are paying payroll taxes as well as income taxes.

I don't know much about taxes though, so there could be a way to avoid that.

edit: Oh right you avoid the above mentioned by setting up a sole proprietorship.

[Elesirdur]

In Canada, and I presume in the US, there are three ways a business can be incorporated: A proprietorship, a partnership, or a corporation.

Proprietorships and partnerships are very simple. Essentially you alone (proprietorship) or with one or more persons (partnership) conduct a business where all the income, assets, and liabilities are borne by those involved in the business. Accounting is really simple and you don't need a business bank account to put funds into. Essentially, any income that you make is considered direct pay and you only have to deduct your personal share of Employment Insurance, Canadian Pension Plan fees, and Provincial/Federal Taxes. (I'm sure there are similar deductions in the US, but I only know Canada but you'll get the idea.) However, with these two forms of a business, you or or your partners are considered directors and are directly liable for everything that is done in the business. So, if you go into debt with the business, your creditors can sue you personally for payment. The activities of the business are directly linked to you as a legal individual and you bear all responsibility. You cannot issue stock or shares with a proprietorship or partnership, though with a partnership your terms of incorporation and subsequent business decisions can dictate how much stake persons have in a partnership which can include income disbursement.

Now, a corporation is a totally different affair with this being the major difference: a corporation is a person in the eyes of the law. A corporation as an individual can hold property and assets, accrue debts and provide credit, and take on responsibility for other individuals. A corporation must have at least one director and all directors share the responsibility for the actions of the corporation. Corporations are often distinguished from the other two types of businesses as "limited liability corporations", often indicated with a Ltd. or LLC appended to the business name, because corporations provide a level of security for employees, investors, and directors because actions of the corporation are actually of a separate legal individual (although responsibility for unlawful activities or malfeasance can be attributed to other "real" people). So, if a corporation goes wildly into debt and cannot pay back its creditors the employees are not legally responsible for those debts, nor are investors, and directors even have some protection - though creditors can request funds from directors under certain circumstances. Also, with a corporation you can also write off certain expenses, like leases, against your income to reduce the amount of profit you make and therefore the amount of tax you must pay (which is often very high, I think in Canada the corporate tax rate is something like 40% of net profit). Corporations can issue stock, share dividends, provide stock options and securities, and all sorts of other magical finances that make up our modern economy.

So, a corporation sounds like it has a lot of advantages and you get to be protected from liability? Well, as a catch corporations are often much more expensive to incorporate (say $500 compared to $50 for a sole proprietorship), require a seperate business bank account which comes with all sorts of headaches, and any money you earn as a corporation must be paid out to you as an employee (regardless if you're a director or not) and you have to pay both your personal share but also the business's share of employee deductions - therefor you pay twice for EI and pension (and actually 1.4 times for employer's CPP contributions in Canada). Also, you are required to file annual reports with the state's business registrar and there are all sorts of other tax laws that apply to a corporation that do not apply to a proprietorship or partnership.

However, corporations do have a lot more flexibility and advantages when trying to raise capital, acquire assets - especially land - and generally engage in all the tricks and manoeuvres that are part of the business world.

If you don't know alot about business and aren't preparing to pay for lawyers, accountants, or making in the hundreds of thousands of dollars a year in income then stick with a sole proprietorship or partnership. Incorporating a corporation is pretty serious, and I am speaking form experience. I took a contracting job a few years back where my employer wanted me to incorporate as a corporation because of some weird tax system he was going to pay me out of. I did so, but man I've had some sleepless nights and long conversations with Revenue Canada regarding all my blunders and ignorance of the responsibilities of being a director of a corporation.

PS: Getting a business credit card is way more difficult than you think, especially for a corporation. Be prepared to show two to five years of growth and profit before even having a single bank look at your for a business credit card or loan for big capital purchases.

[Ferien]

My dad (30 years in tax accounting) advised I do this when I was considering a consulting job, pretty sure for the reasons you're thinking about doing it too. Didn't do too much research into it (I accepted a different offer) but as far as I know, it's very straightforward and simple to do, not too expensive, and can save you a bit of money on taxes and such. It's not going to save you a ton of money, but if you're being paid as an outside contractor or a consultant, it's worth it.

Just make sure you don't set yourself up as a corporation, or you'll have to deal with double taxation.

[Takedown3]

i am an outside contractor for a russian company that pays me based on what i invoice

i work from home and claim absolutely everything even remotely business related, anything computerish, paper, vehicle costs, gas, insurance, repairs, a percentage of all my utility bills based on square footage of office vs house

i have an ontario business number, no company name and not incorporated, there was no paperwork except a business registry that i did probably 10+ years ago back in college for the heck of it

when i do my taxes i file only business taxes and include my personal as well, HR block is fucking hype and ive been loving them for 7 years

i have to buy my own health insurance as well as pay to be a member of my local chamber of commerce to even be able to have that option so there are costs but those are also claimable on my tax return

its very easy to do and it sounds like you are basically in the same situation as me however if you are US it might be different

[sephir]

What Elesirdur said is exactly right however there are a few branches of partnerships and proprietorship out there such as Limited liability partnerships (LLP's).

I don't know what the corporation law is like in your state, but it is something to look into. It may be in your best interest to simply make your business a partnership (or some form of one), compared to a corporation- it depends on what your after(DO RESEARCH and MAKE A PLAN!). Also, at least here in Canada there are 2 types of registrations for corporations: Federal and provincial. You might want to take a look into which one you plan to register with depending on your plans for your business.