I’m looking to incorporate and would like to hear some of the pros and cons from Dopers. I operate as a consultant/freelance writer. More and more clients would be more comfortable if I was a corporation. And if I had business insurance. I am in California. There will be zero employees other than me. I’d, obviously, like to not get taxed twice. So far, I understand that I can avoid this by “zeroing out” (or near it) the corporation at the end of the year. In my ideal scenario. I’d just be able to incorporate as an individual and not even keep a different set of books. But I gather that that is not an option.
Any and all thoughts are greatly appreciated. Thanks.
If a mod thinks this is the wrong forum and would like to move it to GQ, so be it. But I expect, optimistically, that this will become a debate of sorts.
I did this a few years ago and my recollection is as follows:
A C Corp only makes sense if you will have more than a small number of employees.
For a one person consultancy, there is no effective difference between an S Corp and an LLC.
It’s worth the extra money to get a good business lawyer to write up your docs. They can answer your question in great detail. There may well be some subtlety in your particular line of business that will favor an S Corp versus an LLS.
California is a relatively shitty place to set up shop. The State will charge you $800 a year for the honor of having being incorporated here. The $800 goes against State corporate taxes but you’ll have to make a shit load of profit to reach $800 in State corporate taxes. Most States charge nominal yearly incorporation fees.
Don’t go corporate. Besides the tax hike and reporting burdens, your legal fees will make you tired. There is no end to them. I was incorported for a while and would never do it again. As for your clients being impressed, don’t count on it. They will know before they give you your first payment that you are alone. And if it comes as a surprise, that might be your last payment. Nobody likes people who put on airs or seem to be posturing.
I agree about the putting on airs thing, but that is no the case. Every client knows they are hiring me and only me. One of the reasons I want to incorporate is that I can then get business insurance and I would be protected. True? Not true?
I am neither a lawyer or a tax accountant, but here is how I understand it:
I recommend an S corp. As **hajario **pointed out there is no real difference for *you *between an S corp and an LLC, but my accountant feels that the tax laws for an LLC are still too gray and so she was against it based on uncertainty. (Although, now that I type that, I must mention that that was 7 years ago (already!) when she told me that… so perhaps she might have changed her mind by now.)
I don’t know about the laws of Cali, but from a federal view you are not taxed twice on an S Corp. The owners of an S corp are taxed on the profit of the company - the corp is not; this is the difference between an S corp and a C corp.
There are some small tax advantages to an S corp because you may take money out as an “owner draw.” This money is taxed on your personal income tax, but would not be subject to FICA taxes. My accountant said that she was comfortable with me doing nearly 50-50 owner draw and payroll. I recommend you ask a good accountant to explain this.
A C Corp gets taxed on its profits and the shareholders are taxed for any dividends - hence the double tax.
If you do incorporate you must treat it like a business. You must hold annual meetings (yes, with yourself) and do other things that a corp does. Else you run the risk of allowing a someone suing you to “pierce the corporate veil.” This strips away the protection that a corp provides on your personal assets.
In the end, I recommend a chat with a good lawyer and a good accountant who will explain all the nuances to you.
I recommend talking to a CPA and an attorney (talk to both) IN CALIFORNIA. California tax law is different. California liability laws are different. I know here in Minnesota most of my accounting professors recommend LLCs (significant tax advantages, as I recall). The reason you want to talk to both is that a tax accountant will immediately focus on the best structure to save you tax dollars - but that may not be the best structure for liability concerns - which is apparently why you want to incorporate anyway.
My guy set me up as an S Corp. I think for the same reason.
I had forgotten about this. I had to create shares and issue them to myself. I periodically wrote “announcements” about change in corporate policy and then “post” them in a notebook. Lawyers make you do the silliest things.
I was incorporated in 2004 through 2005. Then I went back to being an employee of a company. I had to pay a lawyer $500 to officially disband my corporation in order to not pay the State of California $800 a year for the rest of my life.
Well, I’m a corporate lawyer so I’ll give you a general summation but by no means is this meant to be taken as legal advice. Your particular facts and circumstances will be unique and may well require you to sit down with an attorney before creating any type of entity.
With that caveat firmly in place, here goes:
Any type of entity is basically a legal fiction. That is, the law recognizes the creation of a paper entity in order to lessen the risks of doing business. The most important consideration for creating such a legal fiction is liability protection. I won’t get into the mechanics of what is deemed “adequate capital” but basically you usually create an entity to limit your liability to 3rd parties. In essence, you can only lose what you put in (and whatever you may have built post creation).
C Corp. There is no reason for creating a C Corporation (unless you have significant medical bills but that is a very specific scenario). A C corporation is taxed on two levels. The C Corp itself is taxed as if it were a living, breathing entity. You are also taxed as a shareholder on any distributions from the Corporation. Unless you plan on going public rather quickly then you should not go down this road under any circumstances.
S Corp. A S Corp does not have this problem as it is considered to be a disregarded entity for Federal tax purposes. What does this mean? Basically that the S Corp itself does not pay taxes though you still would as a shareholder (based on distributions). One of the downsides to an S corp is that there are significant limitations on who can be a shareholder and (with some exceptions) only one class of shareholder is allowed. In addition, corporate formalities have to be maintained and the mangement structure is fairly rigid.
LLC. An LLC is taxed similar to an S Corp insofar as it is trated as a disregarded entity for Federal tax purposes. One of the advantages of an LLC is that you can have different classes of members/unit holders and can create a much more flexible management structure. There are no shareholders but members or unit holders depending on the language you use. For a lot of people, an LLC is the way to go. It’s flexible and easy to use. The law on LLC’s is very well established by now and the notion that the tax treatment of LLC’s is somehow “gray” is complete and utter bunkum.
What Lochdale said about your unique personal situation.
I kind of like the S Corp route for smaller businesses. You can get away from the SE taxes on distributions/income that you otherwise pay on just a straight Schedule C. Still have to pay a reasonable salary but the rest is just taxed as ordinary income.
I very often work on super-top-level-double-secret confidential stuff and have to sign these NDAs that are quite onerous. Theoretically, if I lose my notebook or someone hacks into my computer, I could wind up in court.
If I inadvertently recommend, say, a name for a company or product and they go with it, only to find that it is taken in another country, etc., I could wind up in court. I’m not so concerned about anyone actually winning these suits, I am extremely careful and my contract spells out that the service I provide is a strategic and creative one, and that ALL legal responsibilities fall with the client. Again, I could, theoretically, end up in court.
For what it’s worth, I had a discussion with a lawyer the other day about forming an LLC. It’s at least a little expensive here in Massachusetts – maybe $1,500 with lawyers’ fees to get going, then $500 a year to the state thereafter.
There is one important difference. If you are overseas and qualify for the Foreign Earned Income exclusion, you want an S Corp because you will be earning a salary and fill out IRS form 1120S for your company. and LLC may not be earned income and goes on your schedule C.
What **Lochdale ** said. You don’t do a C corp unless you have a good reason. If you can’t think of a good reason already, then you probably don’t have one. Otherwise it’s about ease of administration, simplicity, and your plans for future financing.