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When and why do you register a business?(s Corp, LLC)

Discussion in 'Business & Tax Advice' started by aarontogo, Sep 15, 2012.

  1. aarontogo

    aarontogo Newbie

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    Hi Guys,
    I was reading/searching a lot of posts in the side of the forum and can't really find a good satisfying answer. So If you can help me out that would be awesome. Thanks in advance!

    1. At what point do you decide to register a business? Is it a certain amount you earn every month? Or more like you quit your day job and go full blown IM.

    2. Are some of you working full time and own a company or multiple companies?

    3. When you register a business, what are the benefits other than tax and liability. One thing I don't understand about this is that if the company earns the money and you get a wage(lets say all the money the company made minus the expenses) don't you still have to pay income tax on this? Then where is the tax benefit? Also, if you get a small/no wage and all the money is in the company, how does this benefit the owner when no money is in his pocket.

    4. If you own a company is the money yours? Or the company?

    5. Any books you would suggest for a newbie want to be business owner?

    Thanks again!
     
  2. kboxer7

    kboxer7 Jr. VIP Jr. VIP Premium Member

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    1. It is up to you. Personally if the business will make $xx,xxx per year then for me it makes sense to form a company. Additionally, if the business has a med-high level of risk then for the sake of asset protection I will form one. No sense losing your home, savings, etc. cause one bad client decides to sue you for xxx,xxx for his rankings dropping in google or whatever.

    2. Yes, I work full time in IM and own multiple business entities (S-Corp and LLCs).

    3. Benefits:
    - Trust/legitimacy factor with clients and other businesses you deal with
    - Asset/liability protection (when appropriately formed and maintained your personal assets to a large extent are protected)
    - Taxes

    As for the tax advantages, it really depends on the business structure and tax classification you choose, as well as how and when you wish to be paid.

    LLCs and S-Corps (rather a C-corp with S status election) are what we call "pass thru" entities. This means that income is NOT taxed at the business level, but rather "passes thru" directly to your personal income tax return. In this scenario you pay taxes (federal and state income) PLUS a 15.2% self employment tax.

    This 15.2% self-employment tax is for medicare and Social security. Normally your employer picks up this expense, but since you are your own employer it is on you.

    C-Corps: Are taxed at the corporate level once, then any wages passed to you are taxed again. I'm not going to get into the specifics because for 99% of people on here C-corps are not the way to go.

    If you plan on making a substancial amount of money (high xx,xxx - xxx,xxx) it most likely makes sense to have an S-Corp. They are more paperwork intensive and a little more costly on the front end, but can save you a TON on taxes. Essentially you would be an employee of your S-Corp, pay yourself a wage (w2). This salary would be taxed fully. Any remainder you can pay yourself as a dividend/distribution. The distribution avoids the 15.2% self employment tax. Thus, for every $10k you distribute (not salary) you save $1500 or so.

    Now, there are IRS regulations regarding this. You have to pay yourself a "reasonable salary." This is largely open to interpretation, but a CPA or tax accountant can help you decide. A general rule of thumb is 60% of net revenue as "income/wages" and 40% as a distribution.

    Conversely, if you don't expect to make that much money per year (i.e. xxx,xxx), then an LLC may be the better choice. They are easy to set up and maintain, no W2 paperwork, etc. and generally cost less for filing and tax returns. That said, you lose the benefit of the "distributions" you can take with an S-Corp, but you do still retain the tax benefits of a corp in general.

    General Tax Benefits of Incorporating:
    - More write offs (office, business supplies, computer, etc etc)
    - Can often set up health insurance plans and retirement plans (SEP IRA etc) that can be written off


    Either way, a general consultation with an attorney or CPA is advisable as none of us know your specific circumstances. I promise you it will be worth the money and piece of mind. Additionally, they will make sure you remain fully compliant and pay your estimated quarterly taxes appropriatlely. Nothing worse than an IRS audit or State tax debt collector hitting you up over funds you no longer have.

    Best regards,
     
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  3. CoyoteAssassin

    CoyoteAssassin Elite Member

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    If you are in the US and will need to borrow money for a house, loan, credit cart, etc, you will want to show a certain amount of income in order to apply.

    Also, if the people that pay you are going to report the payment to the IRS, then you will need to do the same.

    At that point, you need to make sure you have an LLC so that you can take advantage of tax credits... and because the "law".

    Remember - Work harder because millions on welfare are depending on you!
     
  4. aarontogo

    aarontogo Newbie

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    Thank you so much for taking the time to answer my questions. I hope it helps other noobs out there like me. I will definitely get consultation when I go that route. Repped and Thanked!
     
  5. kboxer7

    kboxer7 Jr. VIP Jr. VIP Premium Member

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    No problem. If you have any other questions or want to shoot some ideas around let me know.

    I'm not a lawyer or a CPA but I've had plenty of experience with them running my own businesses over the years (5 businesses to be exact, all incorporated under various structures) and am also an MBA graduate with years of corporate experience as well.

    Best regards,
     
  6. CoyoteAssassin

    CoyoteAssassin Elite Member

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  7. aarontogo

    aarontogo Newbie

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    If I have additional questions, I be sure to ask. Thanks!
     
  8. bitencrypt

    bitencrypt BANNED BANNED

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    question 1) the point where it would be profitable.
    question 2) N/A
    question 3) the money is in the details, learn tax law yourself.
    question 4) if the company has money in it's company bank account its the companies money. you act on behalf of the company.
    books>>> black law dictionary
     
  9. GauravJ

    GauravJ Power Member

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    Main benefit of registering as a Corporation entity(eitherway LLC or Joint stock corporation) is that you get your liability to a limited extent
    Thus in case some mis-happening happens in your business premises you are liable to extent of your subscribed capital, unless your venture is a unlimited liability one, as a compensation amount whereas in other forms of business(partnership,sole proprietorship etc) your personal assets can also be seized to
    meet claim amount.(search khanacademy finance videos for mmore insight into this)
    Same case happened with a content sharing website whereby some members uploaded copyrighted content and court assessed $65 Bn as compensation amount but only $105 mn was reimbursed as It was a corporation entity and thus having a limited liability.