Do You Need To Be An LLC Or Corporation?
When I was working at my first full-time job out of school, it wasn’t long before I was getting requests for freelance. I quickly learned that if you make over $600 per year in the U.S., you are required to report it on your taxes. When you are at this stage, you or your accountant will just attach a schedule C form and declare you a sole proprietor.
Then when I went full-time solo in the fall of 2008, one of the things I struggled with was – Should I stay a sole proprietor? Or should I should create a business entity, such as an LLC or S-Corp? After all, I often ask clients this and if they have a business plan before I design their logo. Why? To gauge how serious they are about their company and if they know their target market. So, why should my own company be any different?
In my search for an answer, one of the first steps I took, was taking a class at my local SCORE chapter, called “How to Start and Manage Your Own Business.” It was a full day class, lead by retired business men and women, and talked about everything from the legal structure to how to write a professional business plan. I came away thinking I should definitely create a formal business entity.
I also asked clients about what their own businesses were, researched online at such places as Legal Zoom and at networking events. If I would meet a lawyer or accountant, I would ask their opinion. The result? I came away with many different answers, which was very frustrating. Many said there really is no black and white answer, which quite frankly I didn’t like. I finally ended up deciding by meeting with a lawyer and went over the pro’s and con’s of sole proprietor, LLC or Incorporating.
Below are the three reasons why I ultimately decided to incorporate my own company.
No one can take your company name
I’ll use my own company, Bauerhaus Design, for this example. Let’s say I pay $100 for business cards, $250 for brochures, and place an ad for $250 in a magazine or online all with the name Bauerhaus Design on them. Then, I get a letter from a lawyer in the mail, saying another Bauerhaus Design already exists and I have X amount of days to change my business name. The first company I worked at regularly sent out letters such as these.
And if I did receive such a letter, I would have to pay money for re-printing, change my website address, and all of those dollars that went to advertising are down the drain. And not to mention all of the time it would take to pick another name and re-design everything. Plus, you could lose potential clients in the transition. So, to me paying a fee to make my business official could actually save me money in the long term.
If you should ever get sued, your assets are covered
Let’s face it, no one ever foresees getting sued. But if it were to ever happen, this way your house, car and anything else of value is protected. Only your business would be affected.
Makes you look more official
If you are bidding on a larger client, does it look more official to say pay a deposit to “Rebecca Ritz” or “Bauerhaus Design, Inc.”? Also, think of it this way – You having a business name tells your future clients that you are here to stay. You aren’t going to disappear in a month with their money. You are going to be professional, just like their own business.
Need help deciding between the different structures?
Legal Zoom breaks down the different business structures, such as LLC and Corporations perfectly. Plus, you can get an idea on the price to incorporate or become an LLC. Pricing varies based on state. But in reality, the thing that helped me the most was talking with a lawyer about my specific business and my future goals for it. One last tip – if you are looking for a lawyer, the best referrals I received were from friends, family and clients.
Your turn
What are you? A sole proprietor, LLC or Corporation? And why did you choose that one?
Photo by Attempts at Photography
About the author
Rebecca Bauer Ritz is a logo, web and graphic designer that is passionate about helping start-ups and small businesses find their voice. She has over 12 years experience and owns Bauerhaus Design, Inc.
For me I am still in the setup phase and still looking at what to do. I haven’t decided on what I should do with making it a business or just keeping it a sole proprietorship. I think the best thing that I could do right now is just to keep it simple until I can get my name out more and get more clients. Once I have a client based established I think I would either go to a LLC or INC. I think it would be smart specially for the liabilities of getting sued and protecting your name. Just as much as you don’t want to take another businesses name you don’t want them to take yours.
Great article! I bit the bullet one day and registered a LLC online for around $75, and although nothing has felt very different since then, I know it was a good investment.
Hey, where did you find the LLC for 75$ ? they wanted to charge me 600
You also have to consider how your state taxes an LLC or corporation. For example here in California LLCs are required to pay a minimum annual tax of $800 even if you didn’t make a dime. That can be quite painful particularly if you’re just getting started and trying to make enough to pay the rent.
And don’t think you can get around this by registering as an LLC in another state with lower taxes. California requires the minimum tax from out of state LLCs “doing business in California”. And the law is defined in such a way that just picking up the phone and making a business call while residing in California is “doing business in California”. This of course is in addition to paying the $450 fee (last time I checked) for the privilege of registering your LLC in the state.
So while forming an LLC or S-Corp may seem attractive initially because of the protection they offer, it may be more practical and less expensive to go the sole proprietor route until you’re established and can generate steady monthly revenue.
S-Corp is the way to go. LLC has little protection against your personal items. S-Corp also has dividends that you don’t have to pay the federal fica on which ads up quick if you have a great year. Plus if you work for agencies the w-9 is a mute point and easier on their backlogs.
But don’t you still have to pay fica on yourself? Being a sole prop, you don’t have to file two taxes. Just for yourself.
Am I the sole commenter here with a sole proprietorship? I filed paperwork in January 2009 to do business as Ari Herzog & Associates — which people only see if they write me a check, hire me to speak, etc., as I’m the principal of it. But for the most part, I bill myself as me, myself, and I.
I’m seeing a lot of misunderstandings in the article above as well as in the comments. Firstly, you should really consult a tax accountant because its the details that people often get wrong or get confused with.
Firstly, the $600 dollars threshold that the author was discussing is related to 1099′s. If a company(or your client) has paid an independent contract (you) an amount greater than $600 dollars, then they must report the income to the IRS.
Also, any income earned must be reported. But, if the income earned from a business is greater than $400 dollars, then you must file schedule SE for self-employment tax (FICA and Medicare).
Michael has made an important and very intelligent point in regards to state taxation. California, like many larger states, has minimum taxes on S-Corps and LLCs. Thus, it may not be fiscally realistic to incorporate until you have a steady income stream.
Brian has made an incorrect assumption that S-Corps are superior to LLC’s in asset protection. There have been many documented cases where both types of entities have failed the taxpayer in civil court. Often, the taxpayer’s action leads to the piercing of the corporate veil. You should be careful as an owner to properly separate your personal life from your business life. Failure to maintain a clean and separate entity will result in the loss of your protection.
Also, there are important tax implications to deciding whether you’d like to be incorporated as an LLC or as a S-Corp.
Simply discussing the misconceptions noted above illustrates my point that you should really discuss the matter with a professional.
(Disclaimer: I’m a tax professional)
Great post full of useful tips! My site is fairly new and I am having a baffling time getting my readers to leave comments. They are coming to the website but I have the impression that “nobody wants to be first”.
It was very helpfull thank you so much for sharing. I will share it with my friends. Thanks
Good publish! GA is also my biggest earning. Nonetheless, it’s not really a a great deal.
I’ve been filing online for past 6 years with turbo tax, they guide you through it and then check for possible errors.
having a clatter free content is extremely important for search engines and reduces the load time.
Hey, good blog. Want to get cash for blogging? Check out: http://bit.ly/PaidWriting
Hi,I find out that your site is very beneficial and useful and we were interested if there is a possibility of obtaining More stories like this on your blog. If you willing to aid us out, we will be willing to compensate you… Best regards, Keenan Lootens
thanks for the above cool entry.
Great post! I started following your blog about a month ago and I like your honesty. Good example to emulate.
Assessing the money flow is another essential element within the organization strategy format, so as to sustain a normal money flow to meet the important capital needs. Probability of monetary crisis and also the ways of crisis management should be pointed out within the structure. The company strategy must consist from the advertising plans and technique leading to the expansion in the organization.