Not Doing This One Thing Cost Me $10,000 Last Year
First let me say that I am not a lawyer or a CPA (I don't even play one on TV) and I recommend you consult with both of them prior to doing anything legal or financial (relax most of them give free consultations).
When I first started in business I did like many of you and wanted the fastest and cheapest way possible.
For $12 I filed a DBA Agreement (doing business as agreement) with the state and I was off and running using my social security number for tax purposes, etc.
Fast forward to 2010. For the first time ever I crush it income wise. I make well into the 6 figure mark, pay a lot of debt off (house is the only thing remaining and it will be paid for shortly), etc.
Great right?
Here's how.
Because I was still operating as a sole proprietor I am taking a huge tax hit!
You see not only do I get to pay income tax on the money I earned (lets say it's 25% for easy math sake) BUT I also have to pay like 16% tax for self employment (Social Security, Medicaid, etc ).
That means that my tax bill could be almost 40% of my income for last year - YIKES.
After talking with BOTH a lawyer and a CPA we agreed that setting up an LLC with an S Corporation attachment is the best solution for me. As I understand it, doing the S Corp gives me tax advantages over other options (again not a CPA or an attorney - check with them first).
Now I had a few options on how and who could set everything up for me.
1. The lawyer. Great guy, decent advice BUT he wanted almost $2,000 to set it up.
2. The CPA. Most people don't know this but most CPA's can setup LLC's for customers (double check prior to taking my advice). I've had the same CPA for years and she is great. She only wanted $1500 to do the process.
3. Legalzoom, etc. Look it was the cheapest of the options and seemed pretty simple but since this was my first time ever setting up a company I decided not to use them. They were going to be about $500 if I remember correctly.
Not to mention he has done this 100 times so he was able to walk me through the entire process over the phone and explain everything to me.
Even better - he did it all. I gave him some basic information and he took care of everything.
The best part - I have someone to choke if there is a mistake. You see the self help stuff is all on me if I screw it up. If he screws it up at least I have someone to hit. Hard.
So here is my advice to you.
The second you make a little money (like say $1000) I HIGHLY recommend (with all legal disclaimers inserted here) to setup your business structure in a way that allows you tax benefits and ultimately peace of mind.
Had I done this last year my guess is it would of saved me at least $10,000 cash - if not more.
When I first started in business I did like many of you and wanted the fastest and cheapest way possible.
For $12 I filed a DBA Agreement (doing business as agreement) with the state and I was off and running using my social security number for tax purposes, etc.
Fast forward to 2010. For the first time ever I crush it income wise. I make well into the 6 figure mark, pay a lot of debt off (house is the only thing remaining and it will be paid for shortly), etc.
Great right?
Except I kinda screwed myself
Here's how.
Because I was still operating as a sole proprietor I am taking a huge tax hit!
You see not only do I get to pay income tax on the money I earned (lets say it's 25% for easy math sake) BUT I also have to pay like 16% tax for self employment (Social Security, Medicaid, etc ).
That means that my tax bill could be almost 40% of my income for last year - YIKES.
So here's how I fixed it
After talking with BOTH a lawyer and a CPA we agreed that setting up an LLC with an S Corporation attachment is the best solution for me. As I understand it, doing the S Corp gives me tax advantages over other options (again not a CPA or an attorney - check with them first).
Now I had a few options on how and who could set everything up for me.
1. The lawyer. Great guy, decent advice BUT he wanted almost $2,000 to set it up.
2. The CPA. Most people don't know this but most CPA's can setup LLC's for customers (double check prior to taking my advice). I've had the same CPA for years and she is great. She only wanted $1500 to do the process.
3. Legalzoom, etc. Look it was the cheapest of the options and seemed pretty simple but since this was my first time ever setting up a company I decided not to use them. They were going to be about $500 if I remember correctly.
What did I decide?
So at the end of the day I used a friend of a friend's bookkeeper to set everything up. It cost me more than the self help places (Legalzoom) but half the price of the other options.Not to mention he has done this 100 times so he was able to walk me through the entire process over the phone and explain everything to me.
Even better - he did it all. I gave him some basic information and he took care of everything.
The best part - I have someone to choke if there is a mistake. You see the self help stuff is all on me if I screw it up. If he screws it up at least I have someone to hit. Hard.
So here is my advice to you.
The second you make a little money (like say $1000) I HIGHLY recommend (with all legal disclaimers inserted here) to setup your business structure in a way that allows you tax benefits and ultimately peace of mind.
Had I done this last year my guess is it would of saved me at least $10,000 cash - if not more.
A-1 Survival