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Help....Should I Incorporate?

 
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Darin
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PostPosted: May 03, 2006 11:19 am    Post subject: Help....Should I Incorporate? Reply with quote

I'm self employed, but subcontract for mostly one flooring shop. I have a helper but he works as a sub as well, so there are no tax issues with him. He works for me, but subs for the same shop for tax purposes. I have no health insurance. I make about 100k a year. I write off a portaion of my house, all my work truck, trailer all tools etc. I'm thinking of incorporating. I've heard of lawsuit protection as well as more interesting tax deductions.
Anyone with real advice?

Thanks, Darin
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Erik
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PostPosted: May 03, 2006 11:26 am    Post subject: Reply with quote

Darin, awesome thread. Hey not to hijak, and we can move to PM if you want, but what is involved with "writing things off" aws you say. I have a few small businesses but definitely could not call myself self employed. I am wondering what people mean when they say they "wrote it off as a business expense". I could certianly use a drill press and a travel laptop for my newest venture.

Your thoughts on this would be appreciated.
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lcap
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PostPosted: May 03, 2006 11:29 am    Post subject: Reply with quote

Commingling assets is never ever a good idea. Employees get hurt. Employees lie. Clients complain. Clients sue. Clients lie.

Protect what you have built. Incorporate and put employees on the books as employees. Pay State Industrial, State/Fed unenjoyment. At $100k/year you should be capable of being a legitimate businessman.

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PostPosted: May 03, 2006 11:30 am    Post subject: Reply with quote

Darin,

I asked this same question but I believe the thread got nuked.


To sum it all up. Everyone told me yes.

YOu might want to run a search for muckmeister and inc and search results, it was like an 18 page thread.

To spare you the pain, INC imo.

It's the protection from lawsuits that should be your main concern. Especially being a home owner.

An attorney was posting in that thread as well.

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PostPosted: May 03, 2006 11:33 am    Post subject: Reply with quote

Muckmeister, please dont start pointing fingers at me on that one. I not only wouldn't do that on a business-related topic, I don't even remember seeing it at all.

In other news I have formally requested permission to add a Business & Finance forum on wakeboarder.com.


Last edited by Erik on May 03, 2006 11:39 am; edited 1 time in total
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PostPosted: May 03, 2006 11:36 am    Post subject: Reply with quote

I'd incorporate to protect your personal assets. If my bus. ever gets built up enough for me to need an additional employee - that's the first thing on my list to do.

You should do some research though. There's tons of information on line about different types of organizations for your business. Ultimately - as the business owner, only you can decide.

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PostPosted: May 03, 2006 11:47 am    Post subject: Reply with quote

Why are people so confused about Incorporating? This is as no-brainer as it gets. The only difficult part is picking the name. Pay your $175 filling fee, get your T.I.N. and your done. Vacation on the beaches with your shareholders. Very Happy

Any lawyer or accountant who recommends against Inc. isn't worth two hoots in hell.

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PostPosted: May 03, 2006 12:18 pm    Post subject: Reply with quote

Erik,
I am not pointing fingers at all. In all sincerity, I didn't want him searching for a thread that might be missing.

I know you suggested a business forum as well. Shiat, I gave you 96% approval rating.

Sorry if you misunderstood my statement.

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PostPosted: May 03, 2006 1:46 pm    Post subject: Reply with quote

I'm no expert but with just one employee I think INC is overkill you can do a LLC with alot less paper work and hassle. Unless you plan on going pulic with your business anytime soon. Just a quick search pulled this up.

http://www.bankrate.com/brm/news/biz/Biz_ops/20000831.asp



LLCs
"Most people think that LLCs are probably the wave of the future," says Mark Luscombe, principal analyst for the federal and state tax group at CCH, an electronic and print publisher of tax and business legal information. "It's gradually supplanting other forms, except for companies that eventually are interested in going public."

Advantages: LLCs, like corporations, provide business owners with liability protection. That is, debtors will go after company assets, not your personal assets. That's a step up from partnerships and sole proprietorships when your personal assets may be used to settle a business debt. Unlike corporations, LLCs don't suffer from double-taxation, in which the corporate entity is taxed and then its shareholders' dividends are taxed as well. This benefit applies to LLCs that are classified as partnerships for tax purposes. An LLC tax preparer simply checks a box on his or her federal return to indicate how the organization will be taxed. Some states' tax laws mirror the federal government's treatment of LLCs.

Earnings and losses pass through to the owners and are included on their personal tax returns. There's also less paperwork involved with running an LLC than a formal corporation: "No year-end minutes, no notification of shareholders of meetings and so on," says Dan Zabludowski, a partner with the law firm of Litow, Cutler & Zabludowski, an LLC with offices in Coral Gables and Fort Lauderdale, Fla.

Finally, LLCs are the most flexible when it comes to organization. For example, there are fewer rules regarding who can be a shareholder. They also tend to be more informally run than a regular corporation.

Disadvantages: Tax liability for an LLC varies by state. So if your company is going to operate in several different states, you'll have to know how they treat LLCs before electing to choose this type of corporate structure. An LLC also can't go public, so if you're the owner of a dot-com that envisions an initial public offering down the road, incorporation is a better route to take. Otherwise, you'll have to switch your company from being an LLC to being a corporation. That can add to the cost of your IPO.

Lawyers, who are less familiar with the newer LLCs than regular incorporation, also may charge more for helping you form an LLC than another corporate structure.

The cost of launching an LLC also varies by state. Some states charge more for a LLC than to incorporate, some charge less and some charge the same rate regardless of what form of corporate structure that you choose. A few states even charge special annual fees for LLCs. Finally some states require two or more partners for an LLC so if you're going into business solo, this business format is not for you.

Incorporations
A new business can form a C corporation or an S corporation. According to some press reports, the number of S corporations that are sprouting is actually surpassing the formation of C corporations in part because of the advantages inherent with S corporations. Most businesses just starting out will opt for the S classification.

Advantages: Unlike LLCs, both S corporations and C corporations can go public. For that reason, venture capital companies prefer to work with corporations rather than with LLCs. S corporations, like LLCs, don't suffer from double taxation. C corporations may face double taxation, but they can have incentive stock option plans.

Disadvantages of corporations: As mentioned previously, C corporations face double-taxation, but S corporations also have drawbacks. Their chief disadvantage is that the number of shareholders that an S corporation can have is capped at 35, according to Zabludowski. In addition, there are limitations on who can be a shareholder in an S corporation, adds Simon Lincoln, a solo law practitioner in New York City. "S corporations can't have a corporation or a foreigner as a shareholder," Lincoln says. Both S and C corporations require more ongoing paperwork than an LLC. They must file articles of incorporation, hold directors' and shareholders' meetings, keep corporate minutes and hold shareholder votes on major corporate decisions.

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Erik
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PostPosted: May 03, 2006 2:47 pm    Post subject: Reply with quote

muckmeister wrote:
Erik,
I am not pointing fingers at all. In all sincerity, I didn't want him searching for a thread that might be missing.

I know you suggested a business forum as well. Shiat, I gave you 96% approval rating.

Sorry if you misunderstood my statement.


I understand. I didn't mean to seem like an ass. I have read a lot of your (pretty much 100% constructive) criticism lately and I am just overly defensive these days. Sorry Embarassed
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Darin
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PostPosted: May 03, 2006 5:29 pm    Post subject: Reply with quote

Thanks, I guess that's the push I needed. Now would I be an employee of the corp?
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lcap
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PostPosted: May 03, 2006 7:37 pm    Post subject: Reply with quote

[quote="Erik

I understand. I didn't mean to seem like an ass. I have read a lot of your (pretty much 100% constructive) criticism lately and I am just overly defensive these days. Sorry Embarassed[/quote]

Defensive? Why and what could/should you be defensive about?

Darin

A corporation is a completely seperate entity from yourself. You are an employee for as long as majority of the shareholders want you there. Just make certain you choose to pay into State Unemployment and State Industrial for yourself. When you set up the paperwork with the State, most will let you to elect to pay or not pay. You never know what might happen so pay into it.

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PostPosted: May 04, 2006 4:12 am    Post subject: Reply with quote

Contrary to what I read on this forum, it's never as simple as saying you should do it. Their are many things that must be taken into account before incorporating/forming an LLC. They include the tax implications, additional expenses, your personal financial situation, the state you are planning to operate in, etc. Some people find that it is better/more cost effective to remain a sole proprietorship and buy an umbrella policy to help mitigate risk.

Rarely if ever would I recommend a C corporation, so if you want to incorporate then look at an S Corp or LLC. With an LLC the fees are generally higher, but there is no extra federal tax return to file if it is a single member LLC. You will not have payroll tax returns to file if you are the only employee of the LLC, because you are not considered an employee. Some states do require you to file a franchise tax return, but that depends on where you live. With an S Corp fees are generally lower, but you have an additional federal tax return to file and also payroll tax returns to file on yourself and any employees you have.

There are many other factors and differences, so my advice would be to consult a local CPA/attorney and discuss it with them. They will know the local tax laws, etc. that you need to know to make an informed decision on what type of entity to form.

Erik, if you have income from your projects, you would file a Sch C and you can deduct any related expenses. If you have no income but are working towards the point of generating income, then you can also file a Sch C.
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PostPosted: May 04, 2006 6:34 am    Post subject: Reply with quote

brew,

Can you give me an example of a business in todays world that it's better not to limit your liability? With lawsuits, lawyers and liabilities I can't think of one. Not even if you purchase and sell raw land are you better off not to form an S, C, LLP or an LLC.

Say I purchase and sell raw land and have no employees. The lands prior use was: Farming, Ranching, Mining, Orchard, etc. As all the lawyers know back in the day all kinds of chemicals were used on the land. I sell the land and the new owners get headaches, stomach pains or cancer. Lawyer points finger at property as the cause. I get sued. If I haven't limited my liability by paying my filling fee of $175 the lawyer takes everything I own (except maybe my primary residence if the Homestead act is still in place). With an S, C, LLP or LLC I pull the plug.

As far as taxes go, an S, LLP or LLC is taxed at my personal level. Whatever deductions I had on the personal side still apply. The write offs on the corporate side are much easier to justify, find and defend in an audit. Therefore the corporation wins on the tax side also.

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PostPosted: May 04, 2006 6:54 am    Post subject: Reply with quote

There are lots of small sole proprietorships where the owners are better off staying as a SP. They have limited liability issues and the issues they have can be mitigated by insurance. Also, people that have nothing to lose will generally stay as SP's. It has to be examined on a case by case basis and is not all inclusive.

As far as taxes go, it depends on the state you live in. In TN if you are a SP, you pay federal income tax on your earnings on a Sch C only. If you are a single member LLC, you pay a $300 annual registration fee, federal income tax on your earnings on a Sch C, state excise tax on your earnings, and state franchise tax on your net worth/total assets. If you are an S Corp, you pay federal income tax on your passed through earnings, and the same franchise and excise taxes as an LLC. You also then become an employee and have to pay SUTA/FUTA. In states with a state income tax it will depend on how each entity is taxed.
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PostPosted: May 04, 2006 8:21 am    Post subject: Reply with quote

I'll give you the only two examples I can think of that MAY apply to staying as a Sole Proprietor: Stock Day Trader or an Artist that works from home. Other than those two--nothing.

$300/year is nothing. Paperwork is nothing.

Being an employee and paying State Unemployment Tax and Federal Unemployment Tax is the BEST thing ANYONE who is starting a business can do. YOU never know what will happen in the future. If you hit a dry spell you can collect Unemployement. This may be the difference between paying your bills and filling bankruptcy.

In addition an owner should be an employee so they can elect to pay into State Disability. Like I said you never know what may happen in the future. You get hurt on a job as a S.P. without State Industrial who will pay the bills?

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PostPosted: May 04, 2006 9:12 am    Post subject: Reply with quote

To back the LLC thing up a bit our Law Firm that has been established for over 100 years is now an LLC.

It should tell you something when a law firm of our size changes to an LLC.

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PostPosted: May 07, 2006 7:16 am    Post subject: Reply with quote

J_DOGG, interesting. Most multi-partner law firms (and DR's offices) I know of become LLP's, but really either will work just fine.

Darin, sounds like you are a good candidate for an S-Corp. Sure you could go LLC, but I don't see much benefit in your case.

Find a lawyer you trust (haha) and run with it.

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PostPosted: May 16, 2006 2:36 am    Post subject: Reply with quote

Icap- in your chemical example- the EPA would go back to the time when the particular chemical was used assuming that there was no EPA level 1 or 2 contamination study done prior to the purchase-
Darin- it seems to me the first thing you need to figure out is what exactly are you going to incorporate? Are you going to have the business lease or purchase the equipment you already own? Are you prepared to go to the bank and have this corporation borrow money to buy said equipment> in this case you can expense the interest, depreciate the equipment, expense the insurance you now have to purchase on top of the workmans comp which will be high given the apperant nature of your work.Are you going to pay yourself a salary, or would you rather pay distributions? If it where me, I would inc. under a "C" corporation, then borrow the money to purchase the needed equipment. Sinse you will be paying back the bank, the corp. will probably lose money, thus not paying any taxes itself. During this time when it's losing money you will still be making a salary, and have the purchase money on the equipment you sold to the corp. You will also be building up a loss carry over for upcoming years when the corp. does make money which you can use to reduce profits into the future. Once these loss carry over have been reduced to 0, then simply change your filing status from an C corp. to a S corp. If your really good, then during your C corp years you set your fiscal year end in Sept., then when you change to an S corp you will have to change it to dec. During the 1st 3 month period, you can write off all your bad debt if you have any to get the duduction from the salary you just made from the C corp.>
Yes- I can't spell, but I know what I'm talking about-
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PostPosted: May 16, 2006 5:41 am    Post subject: Reply with quote

I don't see the point in doing what was posted in the last post. Why would you defer your losses to the future, when you can take them today? Also, based on what Darin posted at the beginning, I don't see how he is going to be pushed into enough of a loss to go through the trouble of setting up a C Corp and then converting to an S Corp. He could jack his salary up to push him into a loss, but that would be counterproductive. Also with a C Corp, his home office deduction would be pushed to a miscellaneous itemized deduction where he would more than likely lose it.

If you are set on incorporating without consulting someone and going through all of your finances, then go with the LLC or S Corp. Don't go with the C Corp. As has been said before, one of the main differences between the LLC and the S Corp is that with S Corp you become an employee.
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PostPosted: May 17, 2006 9:35 am    Post subject: Reply with quote

Depending on the bylaws of any corporation, officers can take a salary- Maybe what I outlined above doesn't work in a situation like this- I assume that all the equipment, etc... he now owns is in his name, thus needs to be purchased into the company at fair market value and then depreciated over time. I don't know about the home office deal- I own/in C, S, LLC's, and partnerships, but expense home office computers, trucks, etc.. personally-
Anyway- maybe this only works in larger companies-no offense meant-
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