LLC or S-Corp? (incorporate, proprietorship, wholesale, lawyer)

[Lou82]

Hi, I am looking to start up an e-commerce business. Basically Ill be selling a whole assortment of products online. In order for me to establish a relationship with wholesalers they'll want to see that I am a legal business and that I have a Tax ID number.

I am looking to incorporate myself and from research it appears my two options are either an LLC or an S-Corp, but I am not sure which one to choose. The business will be all mine, ill be running it from home with no employees. I am looking for the best combination of protection from liabilities (i want to be protected in case a customer gets injured using a product I sell) and tax benefits. An LLC appears to be the easiest to start up, but it appears that you get taxed a lot more than an S-Corp, but an S-Corp supposedly is a lot of paper work (though websites like Hubco seem to make things a lot easier) and i am also reading that I will have to establish a board of members, shares, and all that other stuff which confuses me since it'll just be me.

So based on what I am looking to do what is recommended I incorporate as, a LLC or S-Corp?"

Thank You in advance

[Authenticity]

You also have the option of setting up a C Corporation. However, you would have to pay yourself a paycheck complete with withholding etc. I would not recommend this option if you are not planning to grow your business to a large size but I strongly recommend C Corporation if you are. The rest of my answer will assume that you are not intending to build a big business.

A lot people get caught up the "but it's just me" thing. This mindset is for someone who is going to operate legally as a sole proprietor e.g. "John Doe DBA(Doing Business As) My New Company". A legal business that is not a sole proprietorship is and should be treated as a complete and seperate legal entity apart from any natural person. Before I go on I want to advise you to contact both an accountant AND a attorney for detailed strategies and information as this is really not a small matter.

It is simply not possible to have to both a simple setup AND a shield from personal liability. In fact, for a small(micro) business most banks and suppliers are going to require that you sign a personal guarantee anyway. This would be true even if you setup a "C" Corp. As a Corporate officer(you) would be asked to furnish a personal gaurantee. Once you do this with ANYONE your company does business with your "veil of protection" may be pierced. There are many other things (paperwork) that MUST be done to maintain a proper corporate veil (See Attorney and Accountant statements above).

As every entreprenuer should have his/her own knowledge I am going to recommend a couple of books for you to read before you contact an attorney and accountant. If you do not want to enlist the services of a lawyer and/or accountant I would strongly recommend that you reconsider going into business at this time, especially if you do not wish to accept potential unlimited personal liability.

The books are:
The Essential Corporation Handbook
Inc. and Grow Rich
Own Your own corporation (Rich Dad Series)

You are probably thinking that this is all too much because all you want to do is sell online. You can do that with no trouble at all as a sole proprietor. In addition to legal structures, unless you have a unique product that you created and can only be purchased from you it is not as easy as it seems. You will have access to unlimited customers but you will also have unlimited competition. Most small companies selling identical (perfect competition) or even slighty differentiated (monopolistic competition) products only know how to compete on price, which can become a race to the bottom.

I do hope that this helps you and possibly others. Unfortunately there are no short cuts to doing it right.

[HappyTexan]

Here's some reading material. I plan to do something myself in the future and will probably go with LLC. Both do provide some liability protection.

S Corporation vs. LLC: Which Structure is Right for Your Business
The difference between an S-corp and LLC - Jan. 10, 2008
LLC: Limited Liability Company - Associated Content - associatedcontent.com

This one is a nice table of comparisons between several business setups..
C Corporation vs S Corporation vs LLC

[kingdomcome1]

I had the same questions myself about three weeks ago. I started a multi-faceted company(janitorial, security, real state services) and asked my attorney what would be best. He suggested an LLC. This was due to the fact we were starting off small and might not make alot of $$ in the beginning. I was thinking C or S corp, but those two require officers, minutes to taken of meetings, etc(very formal). The thing is though, if you intend to go public at some point, then you will need to consider a C corp. An LLC cannot do this. Hope this helped a little.

[Tek_Freek]

When i started my business in 2002 I spent an hour going over everything I planned on doing, what my goals were, etc with an excellent attorney. He had me set up an LLC and I've never regretted it.

[Lou82]

Thanks for all the wonderful information. Right now I will start off small and it will be just a side job, I have no idea how well I'll do but hopefully I can generate a nice second income.

Ill definitely do more reading and consult with an attorney and accountant.

Thanks again, I really appreciate it.

[mbuszu]

LLC is a great type of entity to start with - once you achieve significant business growth and profit, then you can switch to an S-Corp for the additional tax advantages it can offer. I see the major benefit of running an LLC being that the business expenses can be written off against your other income (let's say you have another job you aren't ready to quit just yet, or you have a spouse who works and you file jointly - you'll be able to take deductions against those income streams for potentially fantastic tax savings). The other major benefit of an LLC is the relative lack of paperwork involved in comparison to an S-Corp (if you have an accountant it will cost you more to have an S-Corp).

[Lou82]

Thanks for the info, I read though that people who are looking to start up a business just on their own with no employees (like i will be doing) shy away from an LLC because the total income gets taxed. Does this tend to be true?

[Authenticity]

Most people shy away from creating an LLC because of the flexibility(complexity) it offers in terms of how it is taxed. You can elect to be taxed in a number of ways (S or C Corp, Partnership or Sole Prop), each with its own benefits and drawbacks. This can be confusing so most move on to something they consider more straight forward.

There is far too much to detail to go into in this forum. Find a "quality" book on LLC and then talk to an accountant / lawyer familiar with your individual income and tax circumstances. With that information they can help you reach a decision most appropriate for your situation.

Hope this helps.

[mbuszu]

Originally Posted by Lou82

Thanks for the info, I read though that people who are looking to start up a business just on their own with no employees (like i will be doing) shy away from an LLC because the total income gets taxed. Does this tend to be true?

I don't know what most people in that situation tend to do, but my wife and I both started LLCs in that situation. We do use an accountant and after doing our own research we discussed the options available with him. His position was fundamentally until you show about 60k per year in profit there's no inherent advantage of an S-Corp.

Regarding tax fundamentals, it would seem as though you don't have too much knowledge. That's not an insult, just an observation from how you have phrased your questions. I was in the same situation years ago when I first started a business. I highly recommend finding a non-franchise CPA with lots of entrepreneural experience.