9 ms·

Lawyer and entrpreneur here. There are 2 main reasons to incorporate: liability protection and ease of administration. You don't say what your side project is,

Lawyer and entrpreneur here. There are 2 main reasons to incorporate: liability protection and ease of administration. You don't say what your side project is, but you have to ask your self whether you need liability protection, that is what are the chances someone is going to sue you for damages. If you feel you need liability protection, then you should form an entity. I recommend an LLC in most cases. It is a pass-through entity for taxes which means you pay taxes on your individual return (though it still must file a business tax return). Also buy insurance. The other reason is ease of administration. A legal entity will have some form of controlling document. In an LLC, it is the Operating Agreement. This spells out the rights and duties of the principals in the business. It also allows for common ownership of the business assets. As principals come and go, the LLC continues on. Finally, if you get big and you bring on investors, they will want to see a legal entity for their protection. The drawbacks of forming an LLC are the time and effort of drafting and filing all the proper incorporating documents, paying the filing fees (in California $800 per year), and the extra tax forms. This is a complicated topic and I have given a high level view. There are lots of resources on the internet and in bookstores on this topic. Nolo.com would be a good place to start.

a3camero 10y ago
Canadian lawyer and entrepreneur here. The Canadian equivalent is a Federal corporation ($200 filing fee + $20/yr). The government's online step-by-step system does most of the work for you, but doesn't touch the share issuance part. You'll need to do that yourself but there are lots of resources available online for how to issue shares to yourself. The main cost is hiring an accountant to do the tax return for you. Or figuring out how to do it yourself using software like TaxTron. If you have employment income + your side project involves a lot of ongoing losses then it may be a good idea to use a partnership or sole proprietorship for tax reasons. Talk to your lawyer/accountant. There are fewer lawsuits here so you may decide a sole proprietorship (unincorporated business) is fine. Each province has some equivalent of a "Master Business License" that allows you to use a name other than your own for business purposes (so you can cash cheques, etc.). To conclude (for Canada): generally startups go with a corporation. Side projects might be a corporation, a partnership or a sole proprietorship.
- kspaans 10y ago
  The main cost is hiring an accountant to do the tax return for you. Or figuring out how to do it yourself using software like TaxTron. Not that I have anything against accountants, but what kind of effort are we talking for filing the taxes yourself? 5 hours vs 1 for a personal income tax return? 10 hours? A weekend? How many pages are there for a corporation (in the simplest case -- I'm sure there is quite a range)?
  - debacle 10y ago
    Depends on the state, but coming from one of the more complicated ones, you can do your LLC related tax duties in a day assuming you've done the requisite and semi-substantial reading.
    - Guest98123 10y ago
      You could also pay an accountant for a year, and then you have a copy of the forms they prepared, and you can ask questions. At that point, you have a template you can use for future years.
    - rbritton 10y ago
      Some tax forms don't have much for software options either, so you end up doing a lot of manual calculations. I've never come across anything for OS X that will do 1065 (the equivalent of 1040 for LLCs, general partnerships, and a few others).
  - a3camero 10y ago
    Here's the main T2 form: http://www.cra-arc.gc.ca/E/pbg/tf/t2/README.html http://www.cra-arc.gc.ca/E/pbg/tf/t2/README.html If you're annoyed about the cost now, wait till you find out about major firms outsourcing work to India and elsewhere for routine tax work.
  - enraged_camel 10y ago
    It's not about effort but rather risk, specifically the risk of filing incorrectly and getting fined (or worse, audited) by the IRS.
JustSomeNobody 10y ago
At what point should one form an LLC? I mean, let's say a project is not yet generating enough income to even pay the fees to incorporate, should the entrepreneur wait? Just curious.
- jjawssd 10y ago
  Fly under the radar until you build up some steam
  - ChuckMcM 10y ago
    its all risk/reward tradeoffs. Your side project blows up and now you're scrambling to become an LLC. There are two kinds of blowup, one is suddenly you're being sued and the other is your being pursued (as in a buyout).
- mikeryan 10y ago
  It's really going to depend on the project and your exposure to litigation combined with your own net worth. If you can get sued and you own a home there's a risk where a corporate shield might be a benefit The truth is if you're just living paycheck to paycheck it's pretty unlikely you'll get sued there's nothing to win. Blood from a stone and all that. The key to assessing risk is figuring out what kind of damages your client can incur which is what they can recover via a suit. One other note LLCs are not the preferred structure for taking investment S and C corps are better for this.
  - davidgh 10y ago
    I would submit that LLCs are better than S Corps for investments. With an S Corp each shareholder must be a human resident of the United States. Any sophisticated investor will not personally take ownership of shares when making an investment but will do it via some type of business structure (i.e. a business that the investor owns or controls will make the investment). Since each shareholder of an S Corp must be a human US resident, investments become more difficult. An LLC can have members that are individuals, corporations, other LLCs, foreign individuals or structures, etc.
no_protocol 10y ago
> paying the filing fees (in California $800 per year) Wow, that seems super high. So if I was running a side project in California I might be stuck deciding between wasting 10% or more of my income on fees or putting my personal assets at risk in a sole proprietorship? Since you mention you are a lawyer, can you comment at all on the limits (if any) of liability protection with an LLC. Is a single-person LLC going to be a solid shield over my personal assets, or are there still possible risks? Edit: It looks like the fees to maintain an LLC in my locality would be less than 5% of the $800 fee mentioned for California. Does California just not like small businesses?
- ChuckMcM 10y ago
  I think California just likes taxing businesses.
  - mikeryan 10y ago
    To be fair California likes taxing everything ;-)
- chias 10y ago
  If it's an internet thing you can incorporate wherever you like. I live in Texas but filed in Wyoming because (a) the forms were super easy, and (b) IIRC the filing fee was $150 and that includes a registered agent.
  - Cerium 10y ago
    This does not apply to California residents. In California you must pay $800 minimum to the state per year if you have a business nexus in the state.
    - chias 10y ago
      How is "business nexus" defined? IANAL, but if your project is purely a website, isn't the residence of you as the person pushing code irrelevant?
ryandrake 10y ago
> The drawbacks of forming an LLC are the time and effort of drafting and filing all the proper incorporating documents, paying the filing fees (in California $800 per year), and the extra tax forms. Bah. I briefly did a side project that did not end up making any money (it was more of a hobby with a partner), and that $800 a year was the biggest buzzkill. What a waste. By far our two biggest yearly expenses were 1. that $800 and 2. paying an accountant* a few hundred to do our 40 page tax return that said $0 at the bottom. Noting that I am NOT a lawyer and my legal advice is worthless: I would not LLC again until whatever project I was working on actually was making money. [*] Sure, I could have probably prepared the tax returns myself, but I was not willing to risk making a typo on page 34 and having the IRS after me for $N,000. No thanks.
- z3t4 10y ago
  When you hire someone to do your taxes, you are still liable. So learn how to do it yourself first!
  - intrasight 10y ago
    When you hire someone to fix your car, you are still liable (to have it break), so learn how to fix it yourself. When you hire someone to fix your body, you are still liable (to die), so better study all the medical textbooks and stay on top of latest research.
    - z3t4 10y ago
      When your service station or doctor screws up they lose thier certificate. When your tax helper screws up you go to jail.
      - AnimalMuppet 10y ago
        But when your doctor screws up, you die.
        10y ago
jusob 10y ago
From my research, if a LLC has a single person behind it, the protection offered is lower. "In many cases, the court will agree and the single member becomes personally liable for the business debts." (http://markjkohler.com/are-single-member-llcs-worth-it/#sthash.aiE67vEu.dpuf http://markjkohler.com/are-single-member-llcs-worth-it/#stha...)
- tedmiston 10y ago
  I'm not so sure about this. The whole point of forming the SMLLC is protection and liability. It's difficult to generalize some of the author's claims. IMO this needs a citation: > In such situations, the plaintiff in a lawsuit against the LLC will ask the judge to set aside the asset protection associated with the company by claiming the company is a sham since it has no records and no Operating Agreement. In many cases, the court will agree and the single member [that’s you] becomes personally liable for the business debts. That said, I am curious to hear more about whether adding a minimal second member, such as a friend paid $1/year makes any difference. Disclosure: Single-member LLC owner. In my case, it's a purely software development company, so assets are minimal.
- TaylorGood 10y ago
  This. If joshuaheard would elaborate on this long-running debate
  - joshuaheard 10y ago
    I don't think the number of people matters much. The key to upholding the liability protection (and not "piercing the corporate veil" - google it) is to treat the company as a separate entity, not your personal slush fund. That means only pay business expenses from the corporate bank account (have a separate corporate bank account), no personal expenses from the business account, and no business expenses from the personal account . If you must use the personal account for business expenses, have the company reimburse you, but try not to make many transfers back and forth. The other most common pitfall (and there are many) is undercapitalization. Make sure your company has enough assets to do business. I would put in at least $10k to start, and then add $5k when you get low. $1k would be the minimum if you are on a budget, I think. Only pull out cash when necessary. Conform to corporate formalities, ie keep your taxes and fees paid, and file annual information statements, or whatever your state requires. When do you incorporate? It's a judgment call. I have a side project I have been working on for 3 years and I haven't incorporated. I would think when you start having significant public contact and sales, and you think it will become a permanent business, it might become worth the expense. The other is if you think it has significant value and/or there are multiple founders. You could also start with a contract and then incorporate down the road. There are lots of ways to go and plenty of material on this subject.
echelon 10y ago
Should I incorporate as an LLC for my Donald Trump text to speech website [1]? I don't anticipate making any money on it, and built it for artistic / educational reasons. I don't know if I'm potentially exposed to libel or slander lawsuits. I honestly don't intend for it to be used in such a way, but I don't want to be hit with a surprise lawsuit. $800 is a lot of money for something that isn't a business venture, but a lawsuit would be terrible... [1] http://jungle.horse http://jungle.horse
- squigs25 10y ago
  I am not a lawyer, but I would not. There is a very small chance that you get sued here.
- TaylorGood 10y ago
  Pending what state you're in, there are others with less of a minimum-tax responsibility. Delaware is a couple hundred, etc. vs. CA $800
jordicostal 10y ago
Good job
arzt 10y ago
What sort of insurance would you buy and where would you recommend buying it?
- joshuaheard 10y ago
  Most insurance companies offer business insurance. The most common is an Errors and Omissions ("E & O") policy. I have a general liability policy of $1 millions coverage that costs about $300 per year.
  - mikeryan 10y ago
    There's also specific cyber security insurance which is good for anyone storing user or customer data.
GotAwesome 10y ago
Have you not considered the "Limited Liability" part of "Limited Liability Company?" If anything bad happens and you get sued, you can fold up your tiny little company and go back home. Where as if you're just a sole-proprietor, you can get sued for literally anything and everything.
- mikeryan 10y ago
  Did you read the whole comment? You don't say what your side project is, but you have to ask your self whether you need liability protection, that is what are the chances someone is going to sue you for damages. If you feel you need liability protection, then you should form an entity.
- Grishnakh 10y ago
  This is simply not true. Did you miss the part about "limited liability"? The limitation to liability is your involvement in the action. If you're the only person in the company, there's zero limit: you're fully responsible for all actions of the company. You don't get to hide behind a sheet of paper just because you filed some LLC paperwork when your product fails and kills someone.
- curried_haskell 10y ago
  It's "limited" liability, not "no" liability.
zengr 10y ago
I wish there were laws for H1B visa holders to work on side projects. I had a chat with an immigration attorney and she said I can't even work on a side project because its still "work" outside of my H1B petition. Going with an LLC is a far dream. I work on side projects but forced to not build something where I can charge for the service because it will be illegal for USCIS. I know many people who do this (work on side projects, help startups for equity) and then create shell companies to move the money. Now that's really illegal and I don't feel comfortable doing that.

a3camero 10y ago

Canadian lawyer and entrepreneur here. The Canadian equivalent is a Federal corporation ($200 filing fee + $20/yr). The government's online step-by-step system does most of the work for you, but doesn't touch the share issuance part. You'll need to do that yourself but there are lots of resources available online for how to issue shares to yourself. The main cost is hiring an accountant to do the tax return for you. Or figuring out how to do it yourself using software like TaxTron. If you have employment income + your side project involves a lot of ongoing losses then it may be a good idea to use a partnership or sole proprietorship for tax reasons. Talk to your lawyer/accountant. There are fewer lawsuits here so you may decide a sole proprietorship (unincorporated business) is fine. Each province has some equivalent of a "Master Business License" that allows you to use a name other than your own for business purposes (so you can cash cheques, etc.). To conclude (for Canada): generally startups go with a corporation. Side projects might be a corporation, a partnership or a sole proprietorship.

kspaans 10y ago
The main cost is hiring an accountant to do the tax return for you. Or figuring out how to do it yourself using software like TaxTron. Not that I have anything against accountants, but what kind of effort are we talking for filing the taxes yourself? 5 hours vs 1 for a personal income tax return? 10 hours? A weekend? How many pages are there for a corporation (in the simplest case -- I'm sure there is quite a range)?
- debacle 10y ago
  Depends on the state, but coming from one of the more complicated ones, you can do your LLC related tax duties in a day assuming you've done the requisite and semi-substantial reading.
  - Guest98123 10y ago
    You could also pay an accountant for a year, and then you have a copy of the forms they prepared, and you can ask questions. At that point, you have a template you can use for future years.
  - rbritton 10y ago
    Some tax forms don't have much for software options either, so you end up doing a lot of manual calculations. I've never come across anything for OS X that will do 1065 (the equivalent of 1040 for LLCs, general partnerships, and a few others).
- a3camero 10y ago
  Here's the main T2 form: http://www.cra-arc.gc.ca/E/pbg/tf/t2/README.html http://www.cra-arc.gc.ca/E/pbg/tf/t2/README.html If you're annoyed about the cost now, wait till you find out about major firms outsourcing work to India and elsewhere for routine tax work.
- enraged_camel 10y ago
  It's not about effort but rather risk, specifically the risk of filing incorrectly and getting fined (or worse, audited) by the IRS.

JustSomeNobody 10y ago

At what point should one form an LLC? I mean, let's say a project is not yet generating enough income to even pay the fees to incorporate, should the entrepreneur wait? Just curious.

jjawssd 10y ago
Fly under the radar until you build up some steam
- ChuckMcM 10y ago
  its all risk/reward tradeoffs. Your side project blows up and now you're scrambling to become an LLC. There are two kinds of blowup, one is suddenly you're being sued and the other is your being pursued (as in a buyout).
mikeryan 10y ago
It's really going to depend on the project and your exposure to litigation combined with your own net worth. If you can get sued and you own a home there's a risk where a corporate shield might be a benefit The truth is if you're just living paycheck to paycheck it's pretty unlikely you'll get sued there's nothing to win. Blood from a stone and all that. The key to assessing risk is figuring out what kind of damages your client can incur which is what they can recover via a suit. One other note LLCs are not the preferred structure for taking investment S and C corps are better for this.
- davidgh 10y ago
  I would submit that LLCs are better than S Corps for investments. With an S Corp each shareholder must be a human resident of the United States. Any sophisticated investor will not personally take ownership of shares when making an investment but will do it via some type of business structure (i.e. a business that the investor owns or controls will make the investment). Since each shareholder of an S Corp must be a human US resident, investments become more difficult. An LLC can have members that are individuals, corporations, other LLCs, foreign individuals or structures, etc.

no_protocol 10y ago

> paying the filing fees (in California $800 per year) Wow, that seems super high. So if I was running a side project in California I might be stuck deciding between wasting 10% or more of my income on fees or putting my personal assets at risk in a sole proprietorship? Since you mention you are a lawyer, can you comment at all on the limits (if any) of liability protection with an LLC. Is a single-person LLC going to be a solid shield over my personal assets, or are there still possible risks? Edit: It looks like the fees to maintain an LLC in my locality would be less than 5% of the $800 fee mentioned for California. Does California just not like small businesses?

ChuckMcM 10y ago
I think California just likes taxing businesses.
- mikeryan 10y ago
  To be fair California likes taxing everything ;-)
chias 10y ago
If it's an internet thing you can incorporate wherever you like. I live in Texas but filed in Wyoming because (a) the forms were super easy, and (b) IIRC the filing fee was $150 and that includes a registered agent.
- Cerium 10y ago
  This does not apply to California residents. In California you must pay $800 minimum to the state per year if you have a business nexus in the state.
  - chias 10y ago
    How is "business nexus" defined? IANAL, but if your project is purely a website, isn't the residence of you as the person pushing code irrelevant?

ryandrake 10y ago

> The drawbacks of forming an LLC are the time and effort of drafting and filing all the proper incorporating documents, paying the filing fees (in California $800 per year), and the extra tax forms. Bah. I briefly did a side project that did not end up making any money (it was more of a hobby with a partner), and that $800 a year was the biggest buzzkill. What a waste. By far our two biggest yearly expenses were 1. that $800 and 2. paying an accountant* a few hundred to do our 40 page tax return that said $0 at the bottom. Noting that I am NOT a lawyer and my legal advice is worthless: I would not LLC again until whatever project I was working on actually was making money. [*] Sure, I could have probably prepared the tax returns myself, but I was not willing to risk making a typo on page 34 and having the IRS after me for $N,000. No thanks.

z3t4 10y ago
When you hire someone to do your taxes, you are still liable. So learn how to do it yourself first!
- intrasight 10y ago
  When you hire someone to fix your car, you are still liable (to have it break), so learn how to fix it yourself. When you hire someone to fix your body, you are still liable (to die), so better study all the medical textbooks and stay on top of latest research.
  - z3t4 10y ago
    When your service station or doctor screws up they lose thier certificate. When your tax helper screws up you go to jail.
    - AnimalMuppet 10y ago
      But when your doctor screws up, you die.
      - 10y ago

jusob 10y ago

From my research, if a LLC has a single person behind it, the protection offered is lower. "In many cases, the court will agree and the single member becomes personally liable for the business debts." (http://markjkohler.com/are-single-member-llcs-worth-it/#sthash.aiE67vEu.dpuf http://markjkohler.com/are-single-member-llcs-worth-it/#stha...)

tedmiston 10y ago
I'm not so sure about this. The whole point of forming the SMLLC is protection and liability. It's difficult to generalize some of the author's claims. IMO this needs a citation: > In such situations, the plaintiff in a lawsuit against the LLC will ask the judge to set aside the asset protection associated with the company by claiming the company is a sham since it has no records and no Operating Agreement. In many cases, the court will agree and the single member [that’s you] becomes personally liable for the business debts. That said, I am curious to hear more about whether adding a minimal second member, such as a friend paid $1/year makes any difference. Disclosure: Single-member LLC owner. In my case, it's a purely software development company, so assets are minimal.
TaylorGood 10y ago
This. If joshuaheard would elaborate on this long-running debate
- joshuaheard 10y ago
  I don't think the number of people matters much. The key to upholding the liability protection (and not "piercing the corporate veil" - google it) is to treat the company as a separate entity, not your personal slush fund. That means only pay business expenses from the corporate bank account (have a separate corporate bank account), no personal expenses from the business account, and no business expenses from the personal account . If you must use the personal account for business expenses, have the company reimburse you, but try not to make many transfers back and forth. The other most common pitfall (and there are many) is undercapitalization. Make sure your company has enough assets to do business. I would put in at least $10k to start, and then add $5k when you get low. $1k would be the minimum if you are on a budget, I think. Only pull out cash when necessary. Conform to corporate formalities, ie keep your taxes and fees paid, and file annual information statements, or whatever your state requires. When do you incorporate? It's a judgment call. I have a side project I have been working on for 3 years and I haven't incorporated. I would think when you start having significant public contact and sales, and you think it will become a permanent business, it might become worth the expense. The other is if you think it has significant value and/or there are multiple founders. You could also start with a contract and then incorporate down the road. There are lots of ways to go and plenty of material on this subject.

echelon 10y ago

Should I incorporate as an LLC for my Donald Trump text to speech website [1]? I don't anticipate making any money on it, and built it for artistic / educational reasons. I don't know if I'm potentially exposed to libel or slander lawsuits. I honestly don't intend for it to be used in such a way, but I don't want to be hit with a surprise lawsuit. $800 is a lot of money for something that isn't a business venture, but a lawsuit would be terrible... [1] http://jungle.horse http://jungle.horse

squigs25 10y ago
I am not a lawyer, but I would not. There is a very small chance that you get sued here.
TaylorGood 10y ago
Pending what state you're in, there are others with less of a minimum-tax responsibility. Delaware is a couple hundred, etc. vs. CA $800

jordicostal 10y ago

Good job

arzt 10y ago

What sort of insurance would you buy and where would you recommend buying it?

joshuaheard 10y ago
Most insurance companies offer business insurance. The most common is an Errors and Omissions ("E & O") policy. I have a general liability policy of $1 millions coverage that costs about $300 per year.
- mikeryan 10y ago
  There's also specific cyber security insurance which is good for anyone storing user or customer data.

GotAwesome 10y ago

Have you not considered the "Limited Liability" part of "Limited Liability Company?" If anything bad happens and you get sued, you can fold up your tiny little company and go back home. Where as if you're just a sole-proprietor, you can get sued for literally anything and everything.

mikeryan 10y ago
Did you read the whole comment? You don't say what your side project is, but you have to ask your self whether you need liability protection, that is what are the chances someone is going to sue you for damages. If you feel you need liability protection, then you should form an entity.
Grishnakh 10y ago
This is simply not true. Did you miss the part about "limited liability"? The limitation to liability is your involvement in the action. If you're the only person in the company, there's zero limit: you're fully responsible for all actions of the company. You don't get to hide behind a sheet of paper just because you filed some LLC paperwork when your product fails and kills someone.
curried_haskell 10y ago
It's "limited" liability, not "no" liability.

zengr 10y ago

I wish there were laws for H1B visa holders to work on side projects. I had a chat with an immigration attorney and she said I can't even work on a side project because its still "work" outside of my H1B petition. Going with an LLC is a far dream. I work on side projects but forced to not build something where I can charge for the service because it will be illegal for USCIS. I know many people who do this (work on side projects, help startups for equity) and then create shell companies to move the money. Now that's really illegal and I don't feel comfortable doing that.