When Does It Make Sense to Form a Corporation?

15 years ago

I think one of the primary benefits of starting a corporation is for legal issues if I'm not mistaken.

For example, you don't have to have an outrageously large business to form an LLC, but as the title suggests, it will limit your liability

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kindsvater

15 years ago

Originally Posted by tandren544

I think one of the primary benefits of starting a corporation is for legal issues if I'm not mistaken.

For example, you don't have to have an outrageously large business to form an LLC, but as the title suggests, it will limit your liability

This is incorrect for 99% of those on the forum, for both a corporation and an LLC. Let me explain why...

Everyone has personal liability for what they do.

For example, if I steal Google's algorithm and create a website called Google Plus, I am personally liable.

Now, assume for my marketing business I create a corporation or LLC. I then steal Google's algorithm and create a website called Google plus. Now, there is personal liability AND liability for the corporation / LLC.

A corporate entity is only helpful on the liability side if you have no personal involvement in whatever it is that causes liability.

For example, if I walk into the Yahoo foyer and slip on a banana peel, Yahoo's owners are not personally liable because they had nothing to do with the banana peel. Yahoo as a company may still have premises liability.

That is why for liability purposes a corporate entity does not help most of the members of this forum.

Even "outsourcing" is not a panacea because of negligent hiring issues and a virtually unlimited supply of legal theories such as conspiracy, joint venture, etc. In other words, if I pay someone from India through Elance to steal Google's algorithm I still have personal liability - and corporate liability if done for the company.

Additionally, if there is a potential liability issue, for your personal liability issues you can defend yourself if you want. Not so with a corporation. Typically, state law will mandate that you hire an attorney to defend the company.

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On the other hand, there may be tremendous tax advantages to having a corporation. You may want to have part of your marketing business within a corporation, and another part as a sole proprietor, so you can play one off against the either depending on where the best tax advantages lie.

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reikidad1961

15 years ago

Originally Posted by kindsvater

Now, assume for my marketing business I create a corporation or LLC. I then steal Google's algorithm and create a website called Google plus. Now, there is personal liability AND liability for the corporation / LLC.

A corporate entity is only helpful on the liability side if you have no personal involvement in whatever it is that causes liability.
.

Your advice is not correct. Whoever started this thread would be wise to seek out competent legal advice. Those here giving out advice about forming a corp or an LLC, have you actually done so yourself?
Here is a place to look for a quick overview of the different business entities, Incorporation Articles, LLC vs S Corp C Corp info, incorporate advice
You can find better advice by googling it.

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dorim

15 years ago

Originally Posted by reikidad1961

Your advice is not correct. Whoever started this thread would be wise to seek out competent legal advice. Those here giving out advice about forming a corp or an LLC, have you actually done so yourself?
Here is a place to look for a quick overview of the different business entities, Incorporation Articles, LLC vs S Corp C Corp info, incorporate advice
You can find better advice by googling it.

I was not giving out legal advice here on my post above, but to answer your question yes I have formed a corporation myself. I did not want to pay for a lawyer's services so I got the required paperwork from my State, filled out the forms, created my articles of incorporation and submitted it with the required fees. The whole process took a few weeks. I file my own taxes too. I use Form 1120 short form.

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kindsvater

15 years ago

Reikidad1961: Your statements in this thread are incorrect. Please stop posting.

My law office has established numerous corporations and/or LLCs. The issue, however, is not about creating an entity but what type of protection it affords you.

I'm not going to repeat myself. Just see Post #10 above.

Here are some examples:

Commission Actions for July 2009

On this page (on the date on making this post) are several enforcement actions, and you will see numerous cases filed against the corporation and the person's responsible for the corporation's actions - employees, officers, directors, etc.

Warriors typically will be the owner, officer(s), and director(s) of their corporation. If the corp gets sued, they also individually get sued BECAUSE THEY ARE PERSONALLY INVOLVED.

So, for example, you set a corporation and you're the only one involved with the company. You create a bogus WSO and defraud a hundred warriors. The money is first paid into the corporate PayPal account, but you withdraw it to your personal account.

Does anyone really think you and that money are beyond the law - and everyone defrauded is left holding the bag against a corporation with no money?

I hope not. Trust me, it doesn't have to the be the FTC. If I file that lawsuit the defendants are the corporation and you individually.

Warriors: 'Googling' legal issues and reading stuff like what Reikidad1961 has said can be really dangerous to your pocketbook. If you have a question about issues like this, move beyond the Internet, and this thread, and talk to a local attorney.

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EdKirby

15 years ago

If you are looking to save on taxes then you may be able to avoid the extra 7.5% self employment tax that you get wacked as a sole-prop by incorporating. This and other deductible expenses should be discussed with a CPA.

Originally Posted by kindsvater

This is incredibly bad advice in many states. An LLC will not provide an iota of legal protection for 99% of the people on this forum. An LLC may also increase your taxes. Talk to a tax professional in your state. A trust can also be disastrous depending your circumstance. Again, find a tax professional

This may be absolutely correct depending on your state. In my home state it made more sense to incorporate because as my corporate attorney explained it, LLCs are a recent newcomer to the state and they haven't been fully tested by the courts, whereas corporations have been tested for 200+ years. In my case it also cost about the same.

Originally Posted by kindsvater

Reikidad1961: Your statements in this thread are incorrect. Please stop posting.

My law office has established numerous corporations and/or LLCs. The issue, however, is not about creating an entity but what type of protection it affords you.

I'm not going to repeat myself. Just see Post #10 above.

Here are some examples:

Commission Actions for July 2009

On this page (on the date on making this post) are several enforcement actions, and you will see numerous cases filed against the corporation and the person's responsible for the corporation's actions - employees, officers, directors, etc.

Warriors typically will be the owner, officer(s), and director(s) of their corporation. If the corp gets sued, they also individually get sued BECAUSE THEY ARE PERSONALLY INVOLVED.

So, for example, you set a corporation and you're the only one involved with the company. You create a bogus WSO and defraud a hundred warriors. The money is first paid into the corporate PayPal account, but you withdraw it to your personal account.

Does anyone really think you and that money are beyond the law - and everyone defrauded is left holding the bag against a corporation with no money?

I hope not. Trust me, it doesn't have to the be the FTC. If I file that lawsuit the defendants are the corporation and you individually.

Warriors: 'Googling' legal issues and reading stuff like what Reikidad1961 has said can be really dangerous to your pocketbook. If you have a question about issues like this, move beyond the Internet, and this thread, and talk to a local attorney.

Absolutely, find a qualified and competent LOCAL tax adviser (CPA) and attorney to help guide you through this process and don't rely on second hand knowledge.

Good Luck!

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kindsvater 15 years ago

Here is how the tax issue can get messy, and this depends on your state of course.

In addition to self-employment tax and related issues, there is the corporate fee/tax.

In California, the annual corporate fee is almost a thousand dollars and the corporation also pays taxes.

A LLC that is not taxed as a corporation has to pay the annual corporate fee plus a fee based on annual total income - which can exceed $10,000.

Toss in C Corp vs. S Corp vs. LLC vs. Sole Proprietorship - and where you can get the best deductions - you'll quickly decide you need a professional to sort this out for your particular situation.

That is the key, to understand that many thousands of dollars in taxes can be saved by doing this right, but you're not going to find a definitive answer for your tax circumstance online.

For most people here, it is the money issues, not liability myths, which need to drive your decision about incorporating or not.
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The Pension Guy

15 years ago

I don't know exactly the tax laws in your country/state... so it always makes sense to talk with a tax professional but in Canada, as a freelancer you can deduct:
- a portion of the rent and utilities (e.g. 15-20% of the total; that percentage being the portion of the place I use as "home office")
- the internet connection
- the computer, software
- domain, hosting, ebooks etc.

Even if you do your own taxes it is good to talk to somebody or to go to a free seminar because it can give you ideas you never thought about.

EDIT. Sorry, I forgot to finish my reply regarding the main question, before hitting the Submit button

Luckily, in the meantime an answer almost identical to what I wanted to say has been posted below.

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Jeff Noel 15 years ago

I'm from Canada so the US recommendations may be a little different. I spoke with both an accountant and a lawyer on the subject of incorporation. My accountant said from a tax perspective it is better to incorperate when you have a gross income of 60k +. My lawyer suggested that I incorporate right away to protect my personal assets against lawsuits and such and with the recent crackdown by the FTC I am now more inclined to incorporate.
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dorim

15 years ago

I formed a corporation a few years ago after somebody threatened to sue me. Prior to that I was a Schedule C sole proprietor. I wanted to form an LLC, but the formation fees were a lot higher than forming a corporation. I am an S corporation. The tax end of a corporation is more complicated than an LLC, but I do my own taxes and all is well.

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KBRMS

15 years ago

Make sure you set up LLC for your legal protection as well as taxes, also set up a trust for your estate and assets in the future when you buy a home. Hope this helps.

Rick

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kindsvater 15 years ago

This is incredibly bad advice in many states. An LLC will not provide an iota of legal protection for 99% of the people on this forum. An LLC may also increase your taxes. Talk to a tax professional in your state. A trust can also be disastrous depending your circumstance. Again, find a tax professional
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sdcast

15 years ago

In a partnership or sole proprietorship, the creditors can go after the owner's personal assets if the company assets are not enough to settle a claim.

that would be one reason to set up a corporation.

but being that you're a writer, i don't see that you should be threatened with any lawsuits. unless you put out a really really bad piece of literature.

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kindsvater

15 years ago

Originally Posted by sdcast

In a partnership or sole proprietorship, the creditors can go after the owner's personal assets if the company assets are not enough to settle a claim.

This may be true for a sole proprietorship, but not for a partnership. It depends on how the partnership is setup and what the laws of a particular state allow. That is, not every partnership is a general partnership where everyone is at equal risk.

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reikidad1961

15 years ago

Originally Posted by kindsvater

This may be true for a sole proprietorship, but not for a partnership. It depends on how the partnership is setup and what the laws of a particular state allow. That is, not every partnership is a general partnership where everyone is at equal risk.

This is not true.

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Easy Cash

15 years ago

It all comes down to turnover and liability.

If you are turning over a significant amount, you can justify the costs of setting up a Corporation. Remember, a corporation will have it's own tax returns and therefore accountants fees.

Liabilility is another important issue.

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Shannon Tani

15 years ago

Thanks for the advice.

Love,
Shannon

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Jillian Slack 15 years ago

Wow!

Lots of advice going on here, but the best thing to do is consult someone who absolutely knows what they are talking about.

I'm taking part in a series of teleseminars by an attorney who is often on CNN, Fox News, The Today Show, etc. She has written several books and her expertise is in family law and also small biz law.

I've learned tons since the series started.

You should definitely find someone in your state who knows exactly what they are talking about as far as the legal and tax aspects of setting up your business.
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Adrian Cooper

15 years ago

I know I have said this several times before, but look at setting up an offshore corporation - no tax, no paperwork to speak of, complete anonymity.

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Don Schenk

15 years ago

One of the folks posting very good information in this thread is an attorney. I'd listen to him. He knows what he is talking about.

Hint - you may be able to tell from his signature.

:-Don

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JohnMcCabe 15 years ago

Shannon, I wouldn't presume to give you specific advice. As others have said, you really should talk to a pro who can advise you on your specific situation and local laws.

If you are worried about liability, ask the pro about acquiring Errors and Omissions insurance rather than going through the hoops of forming a separate legal entity. For a freelance writer, E&O should be fairly inexpensive...
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CDarklock

15 years ago

I've been in business 23 years as a sole proprietor. I have never had a liability issue.

Want to avoid liability? Just be honest, ethical, and conscientious. It's that easy. Strangely enough, if you don't do any damage, you won't be liable for damages.

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KPKP 15 years ago

Personally I would only form in this circumstance if you are looking to limit your liability in some way. Corporations oftentimes have pretty formal paperwork and recordkeeping requirements though, depending on the state you're in. An LLC may be an option for limiting liability and keeping the paperwork to a minimum. But from the information you gave it sounds like a Schedule C filing, or sole proprietorship, is the way to go.

Nothing beats sound advice from an accountant or business formation attorney though. And good luck!
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Lincoln Ryan Banned 14 years ago

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infotaxsquare

Banned 14 years ago

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lenlatimer 14 years ago

If I'm not mistaken, all S corp income go to your personal income and thus avoid the double taxation - yet gives you the limited liability -that's the whole point. I have a S corp but you want find a bank or leasing company that wouldn't want your personal guarantee any way.

What's not being stated is that you can have a home office deduction - but there are rules and regulations - the space can only be used for that- and might raise red flags with the IRS. You should be able to write off all business expenses - include phone, web services and even part of your car expense. It's probably easier with a corp - but with a corp you're required to keep minutes, file with the secretary of state, taxes, etc. - I would say you probably should wait until you're bigger and then get advice from a CPA and attorney.
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When Does It Make Sense to Form a Corporation?

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