Get started the right way with an LLC or Corporation and the SCAMS you’ll want to watch out for
Choose the best business structure for you, be prepared for quarterly taxes, and get a great lawyer behind you. This is a prime time for scammers and they will take advantage of you every chance they get.
There are a few things to consider when deciding which legal entity you should file your business under.
What is the best option for you?
Chances are, when you started out working online, you didn't put much thought into your actual business setup. You probably just set up a PayPal account, added some “buy” buttons to your website, or maybe created an invoice or two for clients. Before you knew it, though, you were thinking about quitting your job, and suddenly, filing taxes was a huge concern.
The truth is, many new entrepreneurs are well on their way to having a full-blown business long before they put any thought at all into legal business structures, and that can really mess with your tax bill. In most states (and we’re speaking of the US, here) you have three choices when it comes to choosing a business structure:
Sole proprietor. This is where you started when you sent your very first Pay Pal invoice. When your business is structured this way, you are your business, and your business is you. There is no separation of funds, either for tax paying purposes or in the event of a law suit. You file your taxes just as you always have, but you’ll also need to add a Schedule C to record your business profits and losses.
Limited Liability Company. A small step up from a sole proprietor, the limited liability company (or LLC) affords you some degree of protection from debts incurred by your business. However, you still file your income tax return as if you and your business are the same – because as far as the IRS is concerned, you are. LLCs are regulated by the state, and not recognized by the federal government.
When you operate as either a sole proprietor or an LLC, you are responsible for paying the entire amount of your taxes. That means that the percentage of Social Security tax your employer used to pay is now your responsibility.
LLCs protect your personal assets, have less paperwork and structure than a corporation, and overall are easier to maintain.
Corporation. When you incorporate your business, you are saying that your business is completely separate from you as an individual. So separate, in fact, that you’re actually an employee.
The good news is, corporations don’t file income tax returns, and you won’t receive 1099 forms from your customers. The bad news is, you will be required to pay yourself a salary. That means that every month, you (the corporation) will be required to send withholding tax to the IRS.
This can mean savings for the entrepreneur, because now the corporation has to foot the bill for half your social security tax. But the added burden of dealing with payroll and even more government paperwork means it might not be worth it to you.
The best advice? When your business turns from a hobby – meaning you’re earning more than pocket money – into a real business, it’s time to talk to an attorney or qualified accountant. They’re the ones who can best advise you about the business entity that makes the most sense for you, your financial situation, and your business goals.
Click here for more detail about the pro's and con's of each business structure.
Don't forget about taxes!
The best information for how and when to pay taxes is straight from the IRS website. The IRS states "As a self-employed individual, generally you are required to file an annual return and pay estimated tax quarterly.
You have to file an income tax return if your net earnings from self-employment were $400 or more. If your net earnings from self-employment were less than $400, you still have to file an income tax return if you meet any other filing requirement listed in the Form 1040 instructions (PDF)."
When it comes to taxes, you don't want to mess around. You can face penalty fees if you don't follow their rules. I generally approximate 40% of my profits will go to the government in one form or another: federal and state taxes, social security, etc.
Here are two really good videos you should check out straight from the IRS:
What path did I take?
When filling out the LLC online application through Rocket Lawyer, I put myself as Registered Agent which is more or less someone listed as being able to accept documents during business hours. I could have added Rocket Lawyer as this, but it was an added expense. I waited less than a week for my Rocket Lawyer account to be updated with my LLC information. I downloaded my PDF documents they provided me and voila! I had LEFT SIDE ART LLC established. It was a great feeling.
Within the paperwork from Rocket Lawyer, there was paperwork for filing for an EIN. An EIN is your tax identification number that you will need to set up a business bank account and for filing your taxes.
A few weeks after I applied for my LLC, I did receive a package in the mail from Rocket Lawyer with everything that I downloaded in PDF form from their website. Rocket Lawyer notified me via email that they were not able to confirm my information with the IRS, otherwise it seems they would have also sent my EIN with my paperwork.
But not to worry, within my packet they sent an EIN application. This one had yellow highlighter marked in the boxes I was responsible for filling out. No guess work! I then had the option of filling in these extra boxes and faxing in the paperwork... Yes, I just said fax. That's the downside. Knowing someone with a truck for those odd times in your life you actually need a truck, and knowing someone with a fax machine is equally valuable. You have to provide the IRS with a return fax number for them to fax you the EIN number.
This was a little too crazy for me, so I went to the web!
Go to www.irs.gov and type in "EIN" in the search box. The application takes only a few minutes and you'll have your EIN. And, boom, you're done! I used the EIN application that came mostly filled out with my LLC paperwork as a guide when on the IRS website. It really came in handy for knowing what to fill in some of the boxes.
Your LLC documents will come with a disclaimer for an Annual Report with the Division of Corporations. Mine read something like this: Between Jan 1st nd May 1st of the calendar year following the year the LLC is formed, you have to pay a fee of $138.75 (or late fee of $400 will be applied). It does say a reminder will be sent to the email address on file, but that's a pretty hefty late fee and with your LLC being so important to your business, it's best to stop what you are doing right now and put that reminder for Jan 1st on your calendar now!
Here's what I spent:
- Rocket Lawyer monthly fee $39.99
- LLC $125
- EIN, Tax ID number $60
- Process fee $49.95
Be aware of scammers!
About a week after I filed for my LLC, I received a letter in the mail that looked very official. I live in Florida and the form was from the state capital Tallahassee. It had my LLC document number and said "2015 Certificate of Status Request Form" at the top. It was for $44.99. I thought it was something I had to do to complete my registration with the state, so I sent in my check a few days after receiving the letter. Literally a few hours later, I checked my mailbox and found another letter that was extremely similar, also from Tallahassee for the same request but at $47.00. I called the number from the first letter and the guy told me that this was a marketing ploy and it was "elective". Surely enough, I referred to both letters and within the text there was the word "elective". This was to receive a laminated copy of my LLC and some other marketing materials. Nothing that I needed or wanted. You may feel differently, but with all of the expenses just to get my LLC I had already paid, I did not want to spend a dime more.
Here are images of what I received with my personal information blocked out. If you live in Florida, you may receive similar letters. I'm not sure what to expect in other states, but as with anything you receive in the mail, read it carefully and call the number to ask questions if you're not sure what to do.
And just when I thought that was it, I received a request for $125 about a month later to go along with minutes that every corporation must record. The company clearly stated they were not associated with the government.