> 2. Tax benefits. You can deduct qualified business expenses from the total income of the business. Here’s a simple example: If you spent $1,000 on servers and your website made $10,000, then you’ll only pay taxes on the $9,000 in profit.
You don't need an LLC to deduct such expenses. Even sole proprietors can deduct business expenses against business profits.
As a European who also worked a year in the US, it's starling how utterly _byzantine_ everything related to operating a business in the US is. Why in the everloving world would I need a lawyer that should be an extremly simple process? Forming an equivalent to a LLC in the majority of EU is a 5-10 step web form signed online, followed by some waiting and a sub 100€ one-time-fee.
Furthermore, financial literacy also seem very, very low, almost as if the powers to be maliciously wanted to misinform people. "You get taxed on profits, not on revenue" seems like the fundamental axiom of business, yet here it is, present as "this one weird tip the IRS hates". See also "I don't want a raise, it'll put me in a higher tax bracket".
That’s not even true. Aside from the U.K. and Estonia, I can’t think of an European country where 1) it costs less than $1K to incorporate 2) you can do it online 3) You can DIY
Italy, Germany and SwitzerlanD just to pick 3 I’m familiar with, are nothing like U.K./Estonia
On the other hand incorporating a C Corp in Delaware costs between $89 and $399 and you can do it online by yourself
In Belgium, starting an llc will set you back:
- about 90€ for registering yourself individually as an economic operator
- about 275€ in state fees for the llc
- 50€ for activating your VAT number
- about 1000€ excluding VAT in legalised robbe^^^notary fees
In all, this is about 1400€ excluding VAT for getting started, excluding accountant or fiscal adviser fees.
Then there is the yearly social contribution of about 350€, even with zero turnover, and more, before you have booked your first cent of revenue.
Well, it depends. Luxembourg initiated the 1 EUR corp, which lets you incorporate as a SARL (a form of LLC) for a pretty low rate.
However, the law then requires that you have an external auditor of your company's books, which runs 1.5-3K for a one-man operation doing uncomplicated things.
Sole proprietor is easier, and you can do your books yourself, but then the liability is unlimited.
I think you'll find many of the southern EU states are similar, the incorporation may be cheap but the accounting is less so.
France: "Auto-entrepreneur" status is free. No conditions (and a limitation on how much money you make). "entreprise individuelle" is between 25,34 € and 130 €. SARL and SAS status is ~200 € [0].
For all of them, you can do it yourself and most of them completely online.
In the Netherlands it was about €75, filled most of the paperwork out online although we did have to go in to the KVK (Chamber of Commerce) to complete the process.
It depends. For any kind of Limited Liability Company, it cannot be done online, you need to see a notary. Costs and process differ depending on what exactly you want:
* Forming a full GmbH will cost around 1000-2000 EUR for lawyer,notary,tax accountant. You strictly speaking don't need lawyer nor tax accountant, but unless you are very familiar with the process, I'd recommend you enlist their services. It will make your life substantially easier. You will also need at least 12500 EUR in cash that will be the founding capital for the GmbH - you'll need to underwrite a security for another 12500 EUR for the rest of the founding capital or just pay a total of 25000 EUR for the founding capital. You can have the new company pay all fees from that founding capital. It's there to be used, you can pay yourself a (reasonable) wage from day one, if you choose to.
* Forming a UG is substantially cheaper: Founding capital is at least 1 EUR (though you should have more or you'll bankrupt the new company when it needs to send the first letter), there's form contracts that cover trivial cases (up to 3 shareholders, even distribution of shares, ...) and in the simple cases, all fees and notary costs should be in the low 3 digits. Keep in mind that moving money in to and out of limited liability companies is not trivial, so you should have sufficient founding capital to cover the initial expected expenses.
If you don't need the protection of a limited liability company, you can always opt for just freelance status - that's a simple registration at the tax office or, if you're multiple people, form a GbR (either by contract or implicitly, but I would really recommend a written contract). You can then register the business online.
> Keep in mind that moving money in to and out of limited liability companies is not trivial, so you should have sufficient founding capital to cover the initial expected expenses.
Can you not, as an owner or director, loan money to the company to cover initial expenses? In the UK it's common to run a Directors Loan Account.
With the DLA you can lend money to the company to start things up, or pay for things personally and claim expense from the company if that's simpler at first (even company formation fees can be claimed like this) which can then sit in the DLA, or use it to borrow (a limited amount) from the company for a short time to smooth over salary/dividend payment planning.
You have to be careful to account for each transaction between personal and company, but if you understand that it seems not especially complicated, and certainly doesn't need founding capital. With my recent company the founding capital was £1.
You can loan money to your own company as shareholder. However, there are a few things to keep in mind:
* a shareholder loan is treated like capital - it’s the last loan to receive payment if the company folds. Probably not a problem in most single person LLCs, it important to keep in mind when it happens. If you pay your own loan and default on another, that’s a crime.
* you cannot in general make up arbitrary terms. The loan must be made with terms that a third party would agree to (“wie unter fremden Dritten”). That means you should - even for your own company - have a contract in place.
Borrowing from the company is possible, but if you give yourself too favorable terms, this could end up being treated as a hidden payment (verdeckte Gewinnentnahme) and that’s tax fraud. Tax litigation has the uncomfortable rule that the burden of proof is reversed- you need to prove your books are in order. If you can’t, tax authorities win the money.
Same if you start paying yourself a salary, but end up not paying on a regular basis. It’s ok if it happens a few times, but a salary should be somewhat regular.
I’d say it’s generally easier to pony up a little cash to cover the initial expenses if you can. I don’t see too much benefit in not having at least some founding capital. You’ll have to come up with the money anyways and it’s not going to sit in the bank account unused.
It’s better to find other ways to make things smooth. For example you can be managing director without drawing a salary.
Just some data points from the UK, not disagreeing with the parent comment.
Lending to the company is useful as an alternative to posting a large amount of _initial_ share capital, which you might simply not have, or not want to declare at first. For example, if you have a main job, and you are starting a company for a side project (to give it clearer legal structure or other benefits of incorporation), and don't have savings to put in. Rather than wait until you've saved up, you might start the company with minimal share capital, then add project funding over time from your main job salary by way of directors loan rather than issuing more shares and all the complications that go with that.
In the UK it's simpler, especially for small, short term director loans:
- When lending to the company, the terms don't have to be those a third party would agree to. It's ok to be interest-free, or to charge interest. If charging it's personal income for the director and personally taxable as interest, and a taxable business expense to the company For a one-person, 100% owned company it will generally be favourable to not charge interest, as well as simpler to document. A drawn up contract is of course advisable, especially for loans with interest, to document what's going on especially for authorities, but it can be a simple one.
In one-person companies it's common to lend to the company as a side effect of other things, for example deferring an agreed salary payment, dividend, or sale of property into the company posted to the loan account instead of paid as cash.
- When borrowing from the company, below £10k and for a strictly limited timing relative to the company accounting year, a director can borrow interest-free without involving taxes (as long as it doesn't follow a pattern that would be deemed an advance on salary instead, then there would be tax/NI implications).
- Otherwise, if insufficient interest "hidden payment" can occur, which we call "benefit in kind", and it's dealt with legally by paying tax on an amount you or your accountant can calculate. Helpfully, an agreeable interest rate is formally specified by the tax authorities; if it's paid there's no benefit in kind to worry about anyway. There is no need to evaluate and document what a third party might agree to.
In practice, the smaller type is not uncommon, and can even occur by accident, for example if a director mistakenly pays for something personal on a company card, that's recorded as DLA until it's paid back or covered by something else.
I suspect you're receiving filtered information (some people have an agenda to prove how bad the government is). You absolutely don't need a lawyer to incorporate. Businesses are registered with the state, not federally, so you're seeing data pertaining to 50 "countries". The lawyer is primarily to prevent you from making what could be costly mistakes but if you don't care about that...
What costly mistakes? I do not know of anyone in my coubtry who would consult a lawyer when registering a company. They might consult some expert in tax planning but never a lawyer.
My personal experience is that it costs about $180 to setup in my state (you can do it yourself, but i paid about $50 to an online service that helps with the process) and then about $130/year to maintain. The initial process took about 30 minutes (plus a few days waiting) and the yearly "reports" take about 15 minutes. It's pretty friction-less.
In most states, you can fill out a form provided by the commerce division and you'll be up and running for a small fee. In my state, it's about $35 and one sided sheet of paper application (or file online).
It's that simple in Arizona with only a $50 filling fee but no annual fee or report required. It's recommend one uses a lawyer to draw up an operating agreement but not required.
A single member LLC in California is treated exactly like a sole proprietorship for tax purposes, except it costs you $800 per year. Unless you know you need it, you probably don’t need it. It won’t protect you from lawsuits, you’ll still have to provide personal guarantees on loans, etc.
Source: had single member CA LLC and wasted $800/year for a few years on it.
> A single member LLC in California is treated exactly like a sole proprietorship for tax purposes,
No, it's not; both for federal and California tax purposes, a single-member LLC chooses whether to be taxed as a corporation (i.e., separately) or as a “disregarded entity” (directly on the owners taxes as for sole proprietorship of the single member is an individual, on the owners taxes as a corporate subsidiary or division if the single member is itself a corporation.)
> It won’t protect you from lawsuits
Yes, it does mean that, absent the conditions for piercing the veil which apply just as they would to any corporation, you are protected from liability for the liabilities of the company. That's the LL in LLC. If you properly observed the formalities of LLC operation, it does protect you.
> you’ll still have to provide personal guarantees on loans, etc.
Well, yeah, if you have a baby business that has no evidence of being credit worthy and no way to secure it's debts, it'll need some guarantee of payment before people will extend it credit. That's kid of obvious—why would someone extend credit to an entity with no demonstrated ability to pay with no one else on the hook?
An example of where you do need a SMLLC is my dentist's LLC was a SMLLC twice in his career due to various partnerships forming and dissolving in the normal course of careers.
Apparently the process of adding or removing partners is, at least in my state, very simple.
My dentist and I don't have much in common so we talk about things like this. Well, he talks, I kinda mumble, under the circumstances. Are LLCs normal for dentists in general or dentists in your state or dentists in my state? I donno, I should ask him next time.
I would imagine all sorts of small service businesses with multiple partners would benefit from this situation, ranging from lawn care to IT field service to law offices. I wonder how this situation interacts with long term inherited family businesses?
This sounds misinformed. The point of an LLC as far as I have always understood it is that if someone sues your company they cannot take your personal assets as collateral but only that which belongs to the company. If someone sues you, you can lose a crappy small LLC or would you rather lose your home as part of a settlement cause somebody is a monster.
Feel free to correct me if I am wrong on this or if this is a misconception.
I am not a lawyer, but I've been in business long enough and have been through enough legal issues to know that forming an LLC isn't sufficient to keep you from getting sued personally or having the corporate veil pierced if someone wants to come after you. In this regard, the parent posters are correct - there may be good reasons for you to form an LLC, but legal protection is a grey area.
> having the corporate veil pierced if someone wants to come after you.
The creditor wanting to pierce the veil is, unsurprisingly, not a sufficient legal condition for piercing the corporate veil, otherwise corporations and LLCs (not just California and not just single-member) would be worthless.
Of course, a sloppily-run LLC is more likely to result in piercing the veil, and a single member LLC that the owner views as a maintenance free magic shield is particularly likely to be sloppily run.
It still doesn't stop someone from suing you personally. Anyone can sue anyone for any reason. You can try to claim "it was the business's fault" but if you're a single member LLC (with no employees) this is very difficult -- but not impossible -- to prove.
I'm not a lawyer, but this happened to my dad a couple of times in his life. The first time, he lost control of his business and had to declare bankruptcy. The second time, it was dismissed.
Edit: For those curious. Having "policies" written down and following those policies to the letter will save you if you are ever personally sued for something your business does.
> It still doesn't stop someone from suing you personally.
It vastly reduces the expected value to them, and thus the incentive, and the expected cost (legal and liability) to you, but no, it's not an absolute shield.
> . You can try to claim "it was the business's fault" but if you're a single member LLC (with no employees) this is very difficult
Well, yes, but the problem with that isn't “single-member LLC” (for which the standard is pretty much the same as any other limited liability entity) but the “you’re” part: a key requirement of maintaining limited liability is that the entity is operated as a distinct thing from the principals. If you view yourself as not distinct from the LLC—that the LLC is something you are and not something you have or operate—that's a pretty good sign that you are thinking about it wrong from the start.
>Of course, a sloppily-run LLC is more likely to result in piercing the veil,
And unless you happen into some money tree-esque line of work it is going to be damn near impossible for a one person LLC to not do things that will get the veil pierced, especially in a business unfriendly regulatory environment where the small businesses are already spread thing by other requirements. The plumber who is unwilling to use his van as a personal vehicle and use his personal checking account as his slush fund is going to get out competed by the plumber who is. The vast majority of single person LLCs simply do not have the luxury of having enough cash on hand to separate things to the extent necessary to be protected.
> The vast majority of single person LLCs simply do not have the luxury of having enough cash on hand to separate things to the extent necessary to be protected.
If you don't have the ability to operate a distinct entity, you shouldn't choose the business form designed for that express purpose and offering benefits conditioned on doing so.
I don't know that the vast majority of single-individual LLCs are actually doing it wrong, though, especially in California where the required cost at least encourages some thought about what you are going to get out of it that justifies it.
Unless you're especially sloppy, it's virtually impossible to "pierce" the corporate veil. It almost never happens. However, if you have a business that could be sued (ie AirBNB rental), and you have a lot of personal assets, then an LLC is a good idea IMO.
If you’re at the level you’re just starting out, there’s a good chance your home is your biggest asset. Forming an LLC won’t let you borrow money with no collateral, so there’s a good chance your gonna have to expose yourself to personal risk. If you have to put your home up as collateral, an LLC may not give you much.
My personal experience was that banks will start treating your LLC as an entity that isn’t an extension of you when you start getting up to a few million USD in revenue. Then you are likely to have assets like accounts receivable, signed contracts, inventory, etc. I may be wrong here, as I didn’t get to that level, but I remember conversations ending with “we can help you when you’re making 3 to 5 million.”
Well if you sign over your home as collateral that's another story entirely. I think we're discussing something else from what I'm more concerned about, which is in regards to lawsuits.
Just for the record, California is way off the curve here. Most states have an LLC fee of $50/yr or less (and 9 have none) making it a more reasonable proposition in those places.
I'm not sure I'd pay that much for the benefits of an LLC in California, but I'd certainly pay $8 in NY or $0 in Texas.
- This depends what you are doing with your business. Doing some software consulting on the side and making 10-20k/year from that? You probably don't need it. You have to decide for yourself what your chances of getting sued fare, but for many people, they are zero to negligible. The chances of getting sued go up quite a bit once you start to employ people though.
- IANAL, but I get the impression that if you do everything right, then piercing that corporate veil isn't so simple. If you start treating the LLC like an extension of yourself, then you run a risk. So don't buy cars or vacations (or any non-business expenses) on the company if you want to maintain that separation. Also, don't commit fraud or other things where the court might find it unreasonable to let you hide behind a corporate veil (if you sell $100,000 in counterfeit prada purses to an unknowing buyer, and then take that money and transfer it from the LLC to yourself, the court probably won't look favorably on that). Also, make sure the company is well capitalized enough. If you open up an LLC and put $10,000 on the credit card without any reasonable expectation that you'd be able to pay that expense, and the court agrees, you might see the corporate veil pierced. But in general, if what you are running is an actual business, there's probably a fairly good chance that piercing the corporate veil will be hard (doesn't mean people can't sue you personally... the question is whether they will be successful in doing so).
- For some people, paying $800/year is worth it for having something that sounds more official. Telling a customer that you are Acme LLC sounds more official, which is worth something.
- I do some side consulting and live in a state where LLC fees are much lower (~130-ish/year). I don't really need the legal protections (the most my customers would reasonably do is ask for their money back, which I would probably do anyway if they were unhappy, rather than deal with a lawsuit). But I like having an LLC with it's own bank account and credit card for tax purposes. It gives me piece of mind that i have completely separate accounts for business expenditures that I can point to in case I were audited, even though my risks of audit are pretty low. That said, I probably wouldn't do it if I were paying $800/year.
> "A court will pierce the veil only if a failure to do so will result in an injustice. This requires more than evidence that a creditor will not get paid. It requires evidence that the corporation or LLC was used in some way to perpetrate a fraud or accomplish some other wrongful purpose. For example, if the shareholders or members formed the entity knowing that they were not providing enough start-up capital to satisfy its contractual obligations, or intentionally moved the company’s assets out of a known creditor’s reach so that the debt could not be paid.
Actions such as those may be considered by courts as abusing the corporate or LLC form. For example, an Alabama court pierced the veil of a solely owned corporation that was hired to do construction work on a house. The shareholder testified that the corporation had no money when the contract was made, that she made no attempt to make sure the corporation had enough money to complete the project, and that she and a friend used the corporation’s bank account – which consisted only of the funds from the plaintiff - for personal purchases at jewelry and sporting goods stores, car services, restaurants, and more."
> If you spent $1,000 on servers and your website made $10,000, then you’ll only pay taxes on the $9,000 in profit.
I wonder if this is correct. Many places require you to deprecate assets such as computers over many years, so the deductions are not all taken out of your profit the year you buy them.
Sounds like this article is conflating the legalities of setting up a business with the accounting of operating one, two different things.
> Many places require you to deprecate assets such as computers over many years, so the deductions are not all taken out of your profit the year you buy them
It's likely that in some accounting regimes you have to to this, but in my own experience with a small business in the US, multiple accountants have simply depreciated assets like our computers immediately. When I originally questioned this our CPA said we could depreciate it over several years but it wasn't necessary in our case (small enough [asset] value and lifetime) and not worth it.
As it stands I imagine if someone is spending $1,000 per year on "servers" these are non-depreciable cloud service expenses.
It depends on what "spent $1,000 on servers" means
If you bought (and own) servers, you must depreciate and amortize them. These are capital expenditures, aka capex
If you rented servers (e.g. AWS, GCP), you deduct the entire cost when it is incurred (or realized, depending on the details). This is an operational expense, aka opex
Depends on your jurisdiction but in many places you are allowed to instantly depreciate small assets, but not allowed to do so with more expensive ones.
sole proprietorships and other unincorporated ventures are getting a lot more respect and seamlessness lately!
the stimulus programs specifically included them and the SBA asked no questions
you do still want the liability protections, more disciplined separation of assets and accounting by having an incorporated name, and deterrent to people looking to sue, alongside additional levels of anonymity if you choose which can further deter potential creditors
they can also make elections to parallel regulatory or tax regimes, which you don't want to alter on your personal body. such as election 475 for active traders, converting capital gains and losses into ordinary income allowing for unlimited tax deductions on losses, instead of the default status for capital.
or setting up "blocker" corporations in other jurisdictions to help other people avoid onerous default tax regimes.
My partner and I just had a very similar conversation as she has several business ventures that she could continue to conduct as a sole proprietor, or she could form a corporate vehicle.
My thinking is - if you are engaged in an ongoing concern, especially if it is responsible for your livelihood, it makes so much sense to explore incorporation of some variety. This could be for no other reason than to split out business vs personal finances and records. As you explore various financing, tax, and legal scenarios though, the cost to form and keep an LLC (or then choose S-corp taxation...) make it completely worth the administrative overhead.
Second nature to me. Not that costly of a “hobby” and I’ve let them go delinquent temporarily if I have a disruption in income.
I’m often sitting down at a local bank branch opening a new account for one.
But I would also say consider Transferwise for business bank accounts. Super easy and you can get Euro SEPA region accounts for your US entities as well. (Without Transferwise update, this is actually hard for American citizens but it might not be something you ever encounter.)
I never do a local/“foreign” llc filing unless the state is fining me to do it.
Can’t really relate to the idea of debating to incorporate. I know the unknowns can be daunting but sole proprietorships are lazy.
the value of the llc or s-corp is the corporate veil. whether or not thats worth the $800 annual charge in CA, on top of other inconveniences, is the question.
You also need to file a California Form 568 tax return with the Franchise Tax Board and pay the $800 annual tax whether or not you have any income, or you get a big fine that increases every month you don't file...
In my state (not California) I have to file paperwork with the state on a yearly basis to confirm the status of my corporation: still active, any changes to the board, etc. There is a fee associated with this as well, though it's far less than $800. If you fail to do this, they just dissolve your corporation.
California is the same, the Statements of Information must be filed annually with the Secretary of State and subject to a filing fee (separate from the franchise fee).
Because governments are monopolies, they can charge monopolistic prices. The only way to not work with them is to physically move your permanent residence. That's a pretty deep moat.
And the worst offenders will take potshots at you on your way out. NY, CA and other states specifically try and extract extra tax revenue from people who said "screw it, I'm out" but didn't do a good enough job documenting how out they in fact were.
>I'm curious what the reasoning behind having a fee that large is.
The fee is just one small part of a litany of compliance hurdles. The purpose is to keep the small guy under the table so that he can be squashed like a bug (by a lawsuit and/or the gov itself) if he F's up.
I'm sure they have some grandiose "think of the children"-esque language they do to justify it but as someone who lives in a similar regulatory environment the practical effect is that businesses either start with lots of investment[1] or they stay as under the table as they can possibly be.[2]
[1] either capital investment, like a facility and fleet of trucks, or time investment in the status quo, for example by a white collar professional (like a PE, lawyer or accountant) spending years working under some other business and building a reputation before striking out on their own or a tradesmen getting a professional license that requires years in a field. Sometimes there's a hybrid approach where you do your 9-5 for someone who's already made the investment and do side gigs to build up a customer base and then at some point you "go legit" and start your own business.
[2] And they either stay small or try and slowly amass the capital to start an above the table business.
Yea similar story. Had a partner and thought we would do a startup. Wanted to be all official so formed a LLC in CA. At the end of the year we had no revenue, and just some source code we had been plugging away at for the year. So our biggest two expenses were: $800 “standard fuck you” tax from California and about $400 to a CPA to write “$0” on a bunch of federal and state tax forms. After a couple of years of that we decided what we were working on was an expensive hobby rather than a startup and dissolved.
In other words, both of you were idiots. Sitting on your butt and programming is not a business. It doesn't make sense to form a company unless you are actually running a business.
FYI -- You and your partner could have formed a general partnership, gotten a separate TIN from the FTB and IRS, and registered a ficticous business name with the county. When the company is ready to sell software, you can transition from a GP to an LLC. Your CPA should have told you this; get a better one next time.
The absolute horrible thing about forming a Llc in California is the $800 FTB tax, that you have to pay irrespective of wether you have any income or not. This is really discouraging for any individual who is trying to start a business and is unsure of the outcome in the initial years.
Also, it’s on the calendar year, not a rolling 12-month calendar. And it isn’t prorated. File your paperwork in early December? That’s $800 now and $800 in a few months.
Wait until January if you’re close to the end of the year and can afford to hold off.
I’m sure they do this on purpose, but if you read the fine print you don’t have to pay the tax the first year so you do get some time to figure it out if you incorporate early in the year.
When you're a very small business losing money the first few years of operating and California sticks you with an $800 bill on top of local taxes that are also levied regardless of income (business personal property), it's a giant slap in the face that makes you want to move your business to pretty much any other state.
Then move. But remember, if you do business in California, you must still pay the franchise fee if you have a company that is NOT a sole proprietor or general partnership. Incorporating in another state will not save you, you must register with Secretary of State as a foreign entity.
Not quite. It's $67/month to just be able to try to stay in business. What benefit does that tax provide to start-ups, and why isn't it a function of the product the business produces instead of the flat rate that's imposed?
Not a lawyer but been through the incorporation process a few times: get a startup lawyer and commit to spending $2-5k just on legal fees in your first year. Each patent you want is $20k so you should probably not waste your time or money with one unless you're damn sure you need it and it's essential to your business.
If you screw up the paperwork it will prevent you from raising money or work with others and kill your business. Honestly, I know it sucks to have to pay money that seems unrelated to your startup, but you'll pay it back many times over and have to set things up properly anyway
Ya, we hired a top tier SV firm. They just used their own fill in the blank forms like you would get from legal zoom. And I even had to make corrections and send it back multiple times because they got the share numbers wrong and forgot to replace multiple mentions of the last company they used the form on.
I have a California LLC and wish I didn't. It has been nothing but an albatross around my neck. I am almost certain I will shut it down at the end of this year.
Look, if you're reading articles like this one, don't do it. Just don't do it. Get competent legal and accounting advice first.
I formed my LLC four years ago when an interesting contracting project came my way. I'd worked as a 1099/Schedule C contractor in the past, but this client wanted me to have an LLC. OK, no big deal.
Then it turned out they also required the LLC to be taxed as an S Corp. No big deal there either, it's a simple IRS form to make that election.
Now guess what? You have to start filing 1120S corporate taxes plus the California equivalent. All the LLC/S Corp income flows right through onto your personal tax return, but you also get to get to file 940 and 941 payroll tax forms and the state equivalents.
And whether your LLC is taxed as an S Corp or not, you have to pay the $800/year California minimum tax on it. Yes, even though the LLC/S Corp really has no net income of its own (as it all flows into your personal tax return), you will owe that $800/year. Even if you create your LLC in another state.
Do not try to do this yourself. You will get it wrong and will pay many thousands of dollars in penalties as I have.
I finally realized I would be much better off just working for another company and letting them deal with all these headaches. They have an entire team to deal with it! If I had a time machine, I would have stuck with regular employment instead of thinking of myself as an independent business.
Forget about the fabled "corporate veil". If the IRS and FTB decide they want their money, they are going to get it.
If you do think this still sounds like a good idea, you must use a payroll service to pay yourself. After my initial fiasco of trying to do it myself, I started using Gusto [1] and they are pretty great.
For filing the LLC itself, I used SunDoc Filings [2] and they are really good too. They helped me on very short notice when I made a mistake on my LLC filing that would have caused it to be rejected.
But really, think twice, or a dozen times, before you open this can of worms.
Sorry for all the italics. :-) But this is something where I have some painful experience, and if I can help steer people away from it I hope it will be helpful.
I have a California LLC too. It's not any harder than the steps explained in the article. Certainly don't form an LLC unless you need one. You'll know you need one when you need one.
> Now guess what? You have to start filing 1120S corporate taxes plus the California equivalent. All the LLC/S Corp income flows right through onto your personal tax return, but you also get to get to file 940 and 941 payroll tax forms and the state equivalents.
This not true of all LLC's, just corporations. If you're forming a small LLC, especially a single member LLC, you can create a pass through entity that avoids all of the ceremony you're explaining. Mentioning all this makes it sound like it's obligatory to establish a corporation when you form an LLC, but that was only necessary in your specific case (probably for the company you were trying do business with to avoid AB5).
That's a really good point, thanks for mentioning it.
Looking back on this, if it had been just an LLC it would have been no big deal at all. It would be a "disregarded entity" with ordinary 1099/Schedule C income, no different from any of my previous clients, with an easy tax return like the ones I'd done many times before.
It was the S Corp election which this client required that really messed everything up.
In hindsight, this truly was the proverbial "client from hell". It was an interesting project, albeit quite an experimental one. I got paid for only a week of work after spending a full month on it, and then I got the ongoing heartache of the S Corp nonsense to boot.
Thanks for pointing out the distinction between the LLC and the S Corp.
It definitely sounds like a terrible client, especially making you jump through these hoops just to work with them. Sometimes it's hard to know until you've started working with them how the relationship will turn out. A client forcing you to form an S-corp and put yourself on payroll doesn't exactly establish trust and is probably a bad sign of things to come.
Despite this, I wouldn't let it sour your view of self-employed work. I was an independent contractor for 6 years and then started a more formal business after. The freedom of picking where, when and how you work, who you work with, how much you'll charge, and most rewarding of all, building and owning your own thing, can be very fulfilling. Maybe you had other reasons to desire employment again, this is certainly not for everyone, but if it's all interesting to you, it's worth it just for the personal growth.
This is the big red flag - I would have pushed back immediately and bailed if they didn't acquiesce. Client has no authority to say how your business should be taxed, that's preposterous. They're doing you a favor by letting you know in advance how difficult they'll be to work with.
Seconded. Filing the 1040 is straightforward compared to the 1120S, and the minimum taxes are real (my experience was NYS, with incorporation in NH for historical reasons).
The 1040 instructions are maddening but nigh-complete. A thoughtful person with enough time on their hands has a prayer of figuring out even relatively subtle tax issues.
The 1120S instructions as recently as ~2015, on the other hand, feel like vague guidance. If the phrase, "Write down your income, write down your expenses, now write down your tax. Sign that you have made no mistakes under penalty of law." makes you nervous, consider expert advice or an arrangement that avoids forming an S-corp.
The state forms are generally dependent upon the federal ones, so if you make an error on the federal form, the error will flow through to the state (which may have similarly vague instructions).
If I ever need to form another corporation, I will absolutely seek professional advice and hand off the filing to a trusted CPA. @Stratoscope is doing the right thing in using plenty of italics.
Perhaps I missed it on my annual reads through the instructions, but I cannot recall seeing a statement: "This is the definitive path to figuring your tax." For the personal income tax instructions, that pathway is clear for almost everyone.
Take your business income items, and add those up.
Take your business expense items, and add those up.
Subtract expense from income. Done...
Personal income tax is much more complicated than small business income tax. Large corporations and partnerships are more complicated than small businesses, but those types of businesses want the additional complexity.
> Do not try to do this yourself. You will get it wrong.
I did it myself and got it right? I closed my LLC last year, not for reasons related to managing the LLC itself.
It's not "hard". It just requires a lot of knowledge of process and filings required. Most folks are best using a CPA to handle it.
It is absolutely best to contract under an LLC or S Corp umbrella, vs personally. You need the liability protection. Perhaps not as much for software, I suppose. But if an average plumber / salon owner / painter / tradesman can get it right, so can you.
> you must use a payroll service to pay yourself.
you don't need to. it's way easier to do the payroll taxes, so you absolutely should, but it's not a hard requirement.
but you don't need to be on the payroll at all. you can take a draw, or take distributions instead. there are tradeoffs for all 3 methods.
> Forget about the fabled "corporate veil". If the IRS and FTB decide they want their money, they are going to get it.
Thanks for asking. They were a California company, and this state has gotten very strict on such things, doing their best to shut down the ability for people to work as independent contractors. It really sucks, but you can't fight city hall.
The idea was that the LLC/S Corp would give my client some protection against anyone claiming that the client would owe employment taxes on what they paid me. So I had to be my own corporation paying myself through a payroll service, to make sure the state and the feds would get their cut.
Put more simply:
"Nice business you've got there. Be a shame if something happened to it."
I think that was more about the client having a hang up than the state or AB5. You either pay payroll taxes as an S-Corp, or you pay self-employment taxes if you take pass-through taxation. Regardless of which taxation method you selected, the company would still be on the hook if you later complain to the Department of Labor that you were misclassified.
You clearly misunderstood something because that's not a CA law and that isn't how a consultant or contractor would prove their legal entitys existence to a client.
None of what he said would have shielded his hiring company from the possibility of reclassification in an IRS audit, though it appears he was claiming it was a California FTB issue.
That's not how CA contractor classification law works, nor how the law has ever worked in the past.
> I finally realized I would be much better off just working for another company and letting them deal with all these headaches. They have an entire team to deal with it! If I had a time machine, I would have stuck with regular employment instead of thinking of myself as an independent business.
It’s almost as though that is all by design, put in place by state legislators who are owned by big corporations that want to keep their primary labor pools enslaved under the W2 regime.
I think all the labor / socialist parties may have gotten it wrong - the worker’s revolution would never be realized through labor unions etc, but rather by organizing incorporation and all the benefits it confers upon the individual. Let every man, woman and child be their own corporation. Wouldn’t that be a different form of capitalism to behold.
Crap. I actually missed 1-2 years of paying the $800 franchise tax because like a lot of other people on this thread, it’s just used for hobbies, makes no money, and lies fallow 99% of the time. I’ve never gotten a fine in the mail for this though. Does anyone know if there’s some sort of online portal or phone number that is the best place for me to pay all the taxes and fines and make sure that in their records I am even?
Perhaps you want the website for the secretary of state. You can also look up any business and see all the public forms plus the address they're using (for those notices you're not getting).
It might be that the LLC is liable for the taxes and not you personally. Do you really want to pay $1600 for something you aren’t really using or do you want to abandon it and walk away?
This puts your name, address, and association with your company name into public record. Not recommended if there is >0 probability of attention from internet crazies.
You can act as your own Registered Agent for a corporation or LLC as long as you have a physical street address in the state where your corporation or LLC is formed.
The actual corporation or LLC being formed, however, cannot name itself as its own Registered Agent.
S corps are generally preferable to LLCs if you are eligible to form one, but it also depends on your goals, i.e. if you intend to raise money, you need an LLC or C Corp.
I formed an S corp for my personal protects for tax reasons. I also used legalzoom, because it's good enough for most small businesses. (And even big ones; Panda Express is an S corp.)
Chapter S election (which an LLC can do, by the way, it's not a particular type of entity) does pass through taxing, and has a thing where the "profit distribution" of the corp, after paying shareholders "a reasonable salary", can be distributed without self-employment taxes, just regular income taxes. So you can save some 15% on some portion of your income--if you have an income larger than whatever you may be able to justify to the IRS as a reasonable salary. Other options may make sense based on how much money is kept in the company, if you have passive investors, how much money you're making, how much work the shareholders do, etc.
> if you form your small business as an SMLLC, and observe a few basic rules (such as keeping business finances separate from personal finances), you should be personally protected from most kinds of business liability
Single-member LLCs which are run properly still get liability protection.
Courts in a variety of states have “pierced the veil” of a single-member LLC from the outside and have held that it is not a separate entity and thus may not be used to protect the assets of the LLC from the creditors of the member.
You get liability protection, yes, but not as much as you would if you had one more member. The veil can be pierced for various reasons, so to reduce risk you want to minimize those reasons as much as possible.
I think this is interesting in that I don't know many people who view LLC's protections this way. The classic example is that if your rental property is in an LLC, then your tenants can't win a suit and get to your own personal house.
These examples of piercing the veil are from the other direction - a personal suit getting access to the LLC assets... Which sort of makes sense - the alternative would be the court ordering the seizure of my assets - which would be my ownership stake in the LLC. So in their example, I'd still expect to lose my ownership stake in my LLC by asset seizure even if I was in a multi-owner LLC... Or had stock in an S-corp.
The rental property investors I’ve known usually form an LP with an LLC as the general partner. Both entities will be solely devoted to a single piece of property. The limited partners are often involved in multiple investments. The LP will often contract a sister LLC for services like property management...so the rent checks get written to an LLC that can screw up without putting the real property asset at direct risk.
The examples cited are how the courts pierced the LLC veil to satisfy someone's personal liabilities. This seems like it's unavoidable because no matter how you split it up, the courts will seize your assets to pay that liability - the effect would be the same if the courts just grabbed the owner's stake in the LLC's.
Your example is what most people think of - LLC's shielding each other and the owners.
I'm mostly pointing out that the parent comment's link is a bit of a boogeyman in that you could have a perfectly structured LLC system, and if you are personally criminally negligent and liable to pay, then the courts will still get your stakes in the LLC's.
That’s why the operating agreement of the LLC should have a charging order protection. It discourages reverse piercing. A charging order protection will allow the LLC to stop distributions to a member who lost such a court case.
In case of an LLC taxed as a partnership the creditor will need to pay the taxes as stated on the K1 but doesn’t receive actual money. Obviously this will make it very unattractive to the creditor to go for a charging order on your membership in the first place.
Piercing the veil can occur for many different reasons, including some as simple as improperly kept notes of annual meetings. Consult with a lawyer to be sure every formality is followed.
Putting hurdles up (like $500 LLC fees) in front of the various things that "legit businesses do" is a form of regulatory capture.
Basically the goal is to force businesses to choose between heavily buying into the status quo or giving government power of arbitrary enforcement over them. The licensed plumbers don't want all the journeymen who haven't spent years getting a license but can install a toilet just as well undercutting them and stealing their gravy business. By imposing regulatory hurdles at every step of the way you keep those "I'm not quite big enough to go 100% above the table" businesses under the table you keep them on the down low and you keep them from affecting regulatory change. By the time those journeymen plumbers have licenses of their own and can be 100% above the table they feel entitled to the gravy and don't want to change anything. (I only picked plumbing because it's a good example in my state, there's plenty of others).
In my state it's $100 to file, and a $50 fee each year (if assets are < $250,000). If you're a single member LLC, you don't even have to have articles of incorporation. You can even file a sketchy shell company and pay a registered agent to use their address. Also, no state taxes either. It's about a 10 minute process.
Can someone tell me how to form LLC in WA state and not publish our home/business address? We will be working from home, but we don’t want our home address to end up in public search records. Any help or recommendation?
I know (because I saw it recently) that if lawyer assists you with forming a C corp in WA, their address can be used and they become an agent for your business, IE: they potentially get all your renewal paperwork, etc. I'm assuming if you had a lawyer form your LLC that they could do the same. That said - I've had a WA LLC for decades, my partner has formed LLCs in WA, etc... it's trivial to do yourself and fairly harmless to include your home address. In the month since she formed her most recent, I think we've had two pieces of junk mail. I did a search with the DOR a few minutes ago - yes, the address shows up for my business but not for hers, so who knows whether your address would even be published?
Get a mailbox at a UPS store or similar mail drop service. Easy peasy. This gets around the "No PO Box" requirements that many government forms have because the mail drop service will have a storefront address. So you end up being 124 Mainstreet Box 47.
I had no idea LLC's were so expensive elsewhere, here in Florida it's roughly $150 last I remember and you can do it online, I think most people I've met just do it all online.
California law is convoluted and Californian courts slow. That makes doing almost everything with a California LLC more expensive than with a Delaware LLC.
The only reason to form a California entity is if you’re doing business with the state.
> If you live and work in California, you are doing business with the state
In a revenue sense, e.g. if you are contracting with the state. Paying California taxes is about equally easy for a California resident, New York resident or Delaware entity.
Or if you’re operating a small business unlikely to ever need to use the courts or raise outside capital, and the extra ~$300 for a Delaware entity isn’t worth the benefits.
I wonder about this. Suppose you incorporate a LLC in Delaware that buys some stocks, and some houses in Arizona and rents them out. But you live in California. Is your LLC “doing business with California”?
Paul is a California resident and a member of a Nevada LLC. The Nevada LLC owns property in Nevada. The LLC hires a Nevada management company to collect rents and provide maintenance. Paul has the right to hire and fire the management company. He occasionally has telephone discussions from California with the management company in Nevada regarding the property. He is ultimately responsible for the property and oversees the management company. Paul conducts business in California on behalf of the LLC. The LLC must file Form 568.
I had a scenario a bit like this, but not involving any of the states you mention above. So long as I didn't have business nexus (IE: an office, employees, etc) that would come on the radar of the state, it was all clean according to my accountant and lawyer - but there's the rub in that if you have those kind of multi-state issues, you'd better have at least one lawyer and at least one accountant who know those jurisdictions and can actually answer this question.
Delaware adds a layer of corporate law which is only applicable and beneficial to C corporations. LLCs are not actually a "corporation" so you don't get that benefit. The extra convolution brings only hassle, and no benefit.
The idea is to be able to prove to the IRS and anyone else that might care that your finances are totally separate. Our accountant strongly recommended this when we set up an LLC a few years ago.
Companies that are entirely foreign-owned are perfectly legal. You do not need a US-based partner.
But if you're not a US-citizen and want to create a company in the US, I would highly recommend NOT forming it in California, for cost/paperwork reasons. There are many other US states that are much more business-friendly to choose from.
(IANAL disclaimer) Merely having customers in California does not create a "locus of business" in CA that would require you to pay the $800 annual fee. On the other hand, if you have an office and/or employees in CA, it probably would.
Billing clients in California can create a nexus but it depends on the amount of sales. A company is considered doing business and subject to California tax laws if state sales or property exceed the following amounts:
* CA sales of $601,967 or 25% of total sales.
* CA real and tangible personal property worth $60,197 or 25% of total property.
Also, if a company engages in any transaction for the purpose of financial gain within California, the Franchise Tax Board considers that doing business within the state. An example would be meeting potential clients during a professional conference and negotiating a sale. This can be done by either a member of the LLC, an employee, or an agent such as an independent contractor.
Word. California always gets its cut. If you're in California, or have customers there, going to other states only increases your potential obligations.
Yeah. I understand the advantages of a Delaware C corporation if you need a C corporation. But I don't see the advantages of a Delaware LLC if you will be operating in California.
If you live in CA and you’re going to cheat the taxman by not registering locally as a foreign corporation, then you might as well register as an Ohio LLC. $99 initial registration and zero annual fee to maintain it.
Sure, Ohio is nice because it has no fees and no reporting requirements for $99. But why stop there when you can go to Arizona and get the same deal for $50.
But seriously, if you want to cheat California, just leave and move to a more business-friendly state and do your business legally. It's 100% not worth it to operate illegally in California, especially for the registration of an entity that's intended to protect you legally.
Oh, also fun, don't forget to explicitly close out your CA business when you finally give up and move out. If you don't, they'll hunt you down for your $800/yr several years later with penalties and interest.
Colorado is $50 to create a LLC, then $10 a year to file your annual report. If you miss the annual report filing date, the fee is $50 to get back in good standing.
As a lawyer, but not your lawyer, please consider a Delaware LLC. California is not where you want to litigate and it’s yearly fees are absurd. Delaware is the gold standard.
> 2. Tax benefits. You can deduct qualified business expenses from the total income of the business. Here’s a simple example: If you spent $1,000 on servers and your website made $10,000, then you’ll only pay taxes on the $9,000 in profit.
You don't need an LLC to deduct such expenses. Even sole proprietors can deduct business expenses against business profits.