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pghquest ... in another thread, you stated that you had a lot of employees in your business, which I understood to be involved with a lot of intellectual property product.
So, at what point do you think it's time to change over from a "sole proprietorship" to a corporation?
pghquest ... in another thread, you stated that you had a lot of employees in your business, which I understood to be involved with a lot of intellectual property product.
So, at what point do you think it's time to change over from a "sole proprietorship" to a corporation?
I have more then one company.. my main one, that deals with intellectual property, I'm a sole proprieter (i.e. the cash cow), I file all of this income and taxes on a 1040. My programmers are all independent contractors.
I also have a corporation based in another state about 8 hours from me which is an entertainment company, a financial drain, its supposed to be a financial drain, and will be for the next 2-3 years before it turns profitable. Reason its a corporation, keeps the liability for the debts off of me. I rent public facilities for the purpose of entertainment, and the government also requires a corporation to sign the lease, not DBA's due to insurance issues, i.e. if a customer would get injured during one of our performances. These taxes are independent of myself, and they get filed seperately. This company has around 20 employees and about 1/2 a dozen interns. We also contract out for independent contractors for seasonal employment.
I'm also a consultant for 14 other entertainment companies, (primarily due to lawsuits that I filed to put their competitors out of business) they all operate under independent contractor contracts, and the income from these all get filed under my 1040.
edited to add:
You stay a sole proprietership until you get several employees, have debt, or are in a lawsuit ridden industry.
Corporations are intended to shield the owners from debt, from liability, and often time setup to raise capital (i.e. you can sell shares of stock). If your a mom and pop industry, in an industry with little risk of being sued (like the posters example of selling stock), have little profit, dba's work just fine. Once you start generating a profit a business owner needs to examine the tax liability of being a sole proprietership vs a corporation because at some limit, its beneficial to move to a corporation just to shield profits and taxes. When starting out, as an individual owner, if you have very little chance of being sued, you stay a DBA until you pass the benefits of creating a Corporation.
None of this takes into consideration if your talking about multiple ownerships, partnerships, investors being involved etc because thats a whole different ball of wax.
Single-member LLC taxed as a proprietorship. Legal protection of the LLC with tax advantages and simple(r) tax filing (Form 1040 Schedule C) of a proprietorship.
So, pghquest ... how does all of this relate to the OP's question about sole p vs LLC?
At what point would a product distribution sole proprietor want or need a corporate umbrella, in your opinion and experience?
He says what I said. Wait until your business is up and rolling. File a DBA, open a bank account under the name of your biz, and see how it goes. Once things take off, and you start having to hire other employees, then get incorporated! Keep it simple!!! And don't make things any more complicated than they need to be!!
Greenie
Last edited by GreenMachine; 10-20-2007 at 11:28 PM..
So, pghquest ... how does all of this relate to the OP's question about sole p vs LLC?
At what point would a product distribution sole proprietor want or need a corporate umbrella, in your opinion and experience?
First you need to examine several aspects
1) Profit. The OP's question stated that it was a startup, operating out of his house.. at this point, $0 profit..
2) Debt. The OP's question stated that he would be financing it out of his pocket, $0 debt..
3) Risk of lawsuits.. The OP's question stated that he was selling socks.. Very low risk of being sued, but even if he was, he should have umbrella policy as you stated. My intellectural company deals with the distribution of books.. I'd say its similar to "socks" because they are cheap products, and the chances of being sued is very very low. If I'm sued, Im sued over a $20 book.. big deal..
You start to look at incorporating when you need to raise capital, need to operate with debt, chance of being sued, or become profitable to the point that the tax benefits to incorporating becomes more obvious. There are actually tax benefits to running as a sole proprietership until your profitable. Example, you can have a job, have real income, but write off any losses or capital expenses for starting your home based business. You can write off some automobile expenses, even write off some utility bills, a % of your housing expenses as a sole proprietership (provided its a home based business). In addition, if you ever decide to close up shop.. you just close up shop, no closing corporation papers, no additional expenses of lawyers, etc.
One other final consideration to consider, zoning. Depending on where one lives, you cant run a home based company out of your home. Once you file corporation papers, you've now notified the local bureau that your running a business out of your home.
Ah, some very pertinent points there which you've brought up.
Zoning, certainly a factor with so many HOA's and covenants these days.
Debt ... since most start-up corps will require personal guarantees, it's a lot of expense to get a corp registered and still have the same personal exposure in one's business as a sole p.
My point here was to bring up ... from other's on this thread with their personal experience (and pghquest owns a much larger operation than I ever have) ... that there's a lot more considerations to whether or not a corp is a needed and justifiable expense and overhead to a small business.
For the OP, it's a lot more than a simple question or two to determine the cost/benefit of a corporation for their proposed business. You need to really explore all the angles and ramifications ... which means being informed as to their existence ... with your accountant and your lawyer, as well as your suppliers ... to make a "good decision".
Ah, some very pertinent points there which you've brought up.
Zoning, certainly a factor with so many HOA's and covenants these days.
Debt ... since most start-up corps will require personal guarantees, it's a lot of expense to get a corp registered and still have the same personal exposure in one's business as a sole p.
My point here was to bring up ... from other's on this thread with their personal experience (and pghquest owns a much larger operation than I ever have) ... that there's a lot more considerations to whether or not a corp is a needed and justifiable expense and overhead to a small business.
For the OP, it's a lot more than a simple question or two to determine the cost/benefit of a corporation for their proposed business. You need to really explore all the angles and ramifications ... which means being informed as to their existence ... with your accountant and your lawyer, as well as your suppliers ... to make a "good decision".
Absolutely. I think most people have a tendancy to just "overdue" what is actually needed. Lets run out form a corporation, get company credit cards, get company loans, they spend 6 months getting all the paperwork together, spending $ to pay lawyers, rent space, hire people and then sit back and their company never gets over that initial "debt" and headaches that forming a corporation actually create.
While some businesses are ideal to incorporate just due to the nature of the business like my entertainment company, or a bar my family owns because of lawsuit risks, most companies begin as a simply plan with no debt and there is absolutely no need to spend the time, money, or resources to go full blown.. Start creating a profit, let the profit then dictate your next steps, use the profits to then explore incorporating rather then personal expenses.
We have a home based internet business and I asked the same question months ago on here and also received different answers. I met with SCORE, spoke with friends that are business owners, spoke with an accountant and decided on an LLC. It's easy, inexpensive and gives more piece of mind with the liability issues. I have more then one business, so I wanted to separate the other businesses & my personal assets from my internet company, that's why I did it. It's super easy, you can do it yourself online if you wanted to.
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