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gojomo
brtkdotse
As a European who also worked a year in the US, it's starling how utterly _byzantine_ everything related to operating a business in the US is. Why in the everloving world would I need a lawyer that should be an extremly simple process? Forming an equivalent to a LLC in the majority of EU is a 5-10 step web form signed online, followed by some waiting and a sub 100€ one-time-fee.
Furthermore, financial literacy also seem very, very low, almost as if the powers to be maliciously wanted to misinform people. "You get taxed on profits, not on revenue" seems like the fundamental axiom of business, yet here it is, present as "this one weird tip the IRS hates". See also "I don't want a raise, it'll put me in a higher tax bracket".
eaenki
That’s not even true. Aside from the U.K. and Estonia, I can’t think of an European country where 1) it costs less than $1K to incorporate 2) you can do it online 3) You can DIY
Italy, Germany and SwitzerlanD just to pick 3 I’m familiar with, are nothing like U.K./Estonia
On the other hand incorporating a C Corp in Delaware costs between $89 and $399 and you can do it online by yourself
markvdb
In Belgium, starting an llc will set you back: - about 90€ for registering yourself individually as an economic operator - about 275€ in state fees for the llc - 50€ for activating your VAT number - about 1000€ excluding VAT in legalised robbe^^^notary fees
In all, this is about 1400€ excluding VAT for getting started, excluding accountant or fiscal adviser fees.
Then there is the yearly social contribution of about 350€, even with zero turnover, and more, before you have booked your first cent of revenue.
Mutjake
275 € in Finland, when done online (+you’ll need a bank account for the company). AFAIK many people DIY.
mellavora
Well, it depends. Luxembourg initiated the 1 EUR corp, which lets you incorporate as a SARL (a form of LLC) for a pretty low rate.
However, the law then requires that you have an external auditor of your company's books, which runs 1.5-3K for a one-man operation doing uncomplicated things.
Sole proprietor is easier, and you can do your books yourself, but then the liability is unlimited.
I think you'll find many of the southern EU states are similar, the incorporation may be cheap but the accounting is less so.
Fiahil
France: "Auto-entrepreneur" status is free. No conditions (and a limitation on how much money you make). "entreprise individuelle" is between 25,34 € and 130 €. SARL and SAS status is ~200 € [0].
For all of them, you can do it yourself and most of them completely online.
[0]: https://www.service-public.fr/professionnels-entreprises/vos...
_31
In the Netherlands it was about €75, filled most of the paperwork out online although we did have to go in to the KVK (Chamber of Commerce) to complete the process.
messe
Just chiming in: it's possible to do all of that in Ireland.
simplyinfinity
In Bulgaria it cost me 50 euros to incorporate using a service :D
Edit: yes, it's not entirely online, but it takes half a day to complete
DoingIsLearning
Portugal:
- Online (with a citizen ID card reader)
- A fully registered Ltd company within an hour (that's the gov marketing slogan)
- Costs ~ 360 EUR
dboreham
I suspect you're receiving filtered information (some people have an agenda to prove how bad the government is). You absolutely don't need a lawyer to incorporate. Businesses are registered with the state, not federally, so you're seeing data pertaining to 50 "countries". The lawyer is primarily to prevent you from making what could be costly mistakes but if you don't care about that...
I suspect financial literacy is low everywhere.
jeltz
What costly mistakes? I do not know of anyone in my coubtry who would consult a lawyer when registering a company. They might consult some expert in tax planning but never a lawyer.
chadash
My personal experience is that it costs about $180 to setup in my state (you can do it yourself, but i paid about $50 to an online service that helps with the process) and then about $130/year to maintain. The initial process took about 30 minutes (plus a few days waiting) and the yearly "reports" take about 15 minutes. It's pretty friction-less.
codpiece
In most states, you can fill out a form provided by the commerce division and you'll be up and running for a small fee. In my state, it's about $35 and one sided sheet of paper application (or file online).
agensaequivocum
It's that simple in Arizona with only a $50 filling fee but no annual fee or report required. It's recommend one uses a lawyer to draw up an operating agreement but not required.
PopeDotNinja
A single member LLC in California is treated exactly like a sole proprietorship for tax purposes, except it costs you $800 per year. Unless you know you need it, you probably don’t need it. It won’t protect you from lawsuits, you’ll still have to provide personal guarantees on loans, etc.
Source: had single member CA LLC and wasted $800/year for a few years on it.
dragonwriter
> A single member LLC in California is treated exactly like a sole proprietorship for tax purposes,
No, it's not; both for federal and California tax purposes, a single-member LLC chooses whether to be taxed as a corporation (i.e., separately) or as a “disregarded entity” (directly on the owners taxes as for sole proprietorship of the single member is an individual, on the owners taxes as a corporate subsidiary or division if the single member is itself a corporation.)
> It won’t protect you from lawsuits
Yes, it does mean that, absent the conditions for piercing the veil which apply just as they would to any corporation, you are protected from liability for the liabilities of the company. That's the LL in LLC. If you properly observed the formalities of LLC operation, it does protect you.
> you’ll still have to provide personal guarantees on loans, etc.
Well, yeah, if you have a baby business that has no evidence of being credit worthy and no way to secure it's debts, it'll need some guarantee of payment before people will extend it credit. That's kid of obvious—why would someone extend credit to an entity with no demonstrated ability to pay with no one else on the hook?
VLM
An example of where you do need a SMLLC is my dentist's LLC was a SMLLC twice in his career due to various partnerships forming and dissolving in the normal course of careers.
Apparently the process of adding or removing partners is, at least in my state, very simple.
My dentist and I don't have much in common so we talk about things like this. Well, he talks, I kinda mumble, under the circumstances. Are LLCs normal for dentists in general or dentists in your state or dentists in my state? I donno, I should ask him next time.
I would imagine all sorts of small service businesses with multiple partners would benefit from this situation, ranging from lawn care to IT field service to law offices. I wonder how this situation interacts with long term inherited family businesses?
giancarlostoro
> It won’t protect you from lawsuits,
This sounds misinformed. The point of an LLC as far as I have always understood it is that if someone sues your company they cannot take your personal assets as collateral but only that which belongs to the company. If someone sues you, you can lose a crappy small LLC or would you rather lose your home as part of a settlement cause somebody is a monster.
Feel free to correct me if I am wrong on this or if this is a misconception.
poulsbohemian
I am not a lawyer, but I've been in business long enough and have been through enough legal issues to know that forming an LLC isn't sufficient to keep you from getting sued personally or having the corporate veil pierced if someone wants to come after you. In this regard, the parent posters are correct - there may be good reasons for you to form an LLC, but legal protection is a grey area.
PopeDotNinja
If you’re at the level you’re just starting out, there’s a good chance your home is your biggest asset. Forming an LLC won’t let you borrow money with no collateral, so there’s a good chance your gonna have to expose yourself to personal risk. If you have to put your home up as collateral, an LLC may not give you much.
My personal experience was that banks will start treating your LLC as an entity that isn’t an extension of you when you start getting up to a few million USD in revenue. Then you are likely to have assets like accounts receivable, signed contracts, inventory, etc. I may be wrong here, as I didn’t get to that level, but I remember conversations ending with “we can help you when you’re making 3 to 5 million.”
redis_mlc
It's a misconception.
jccooper
Just for the record, California is way off the curve here. Most states have an LLC fee of $50/yr or less (and 9 have none) making it a more reasonable proposition in those places.
I'm not sure I'd pay that much for the benefits of an LLC in California, but I'd certainly pay $8 in NY or $0 in Texas.
dugmartin
It’s $500 here in Massachusetts with an extra $20 fee to file your annual report and pay online.
chadash
A few counterpoints:
- This depends what you are doing with your business. Doing some software consulting on the side and making 10-20k/year from that? You probably don't need it. You have to decide for yourself what your chances of getting sued fare, but for many people, they are zero to negligible. The chances of getting sued go up quite a bit once you start to employ people though.
- IANAL, but I get the impression that if you do everything right, then piercing that corporate veil isn't so simple. If you start treating the LLC like an extension of yourself, then you run a risk. So don't buy cars or vacations (or any non-business expenses) on the company if you want to maintain that separation. Also, don't commit fraud or other things where the court might find it unreasonable to let you hide behind a corporate veil (if you sell $100,000 in counterfeit prada purses to an unknowing buyer, and then take that money and transfer it from the LLC to yourself, the court probably won't look favorably on that). Also, make sure the company is well capitalized enough. If you open up an LLC and put $10,000 on the credit card without any reasonable expectation that you'd be able to pay that expense, and the court agrees, you might see the corporate veil pierced. But in general, if what you are running is an actual business, there's probably a fairly good chance that piercing the corporate veil will be hard (doesn't mean people can't sue you personally... the question is whether they will be successful in doing so).
- For some people, paying $800/year is worth it for having something that sounds more official. Telling a customer that you are Acme LLC sounds more official, which is worth something.
- I do some side consulting and live in a state where LLC fees are much lower (~130-ish/year). I don't really need the legal protections (the most my customers would reasonably do is ask for their money back, which I would probably do anyway if they were unhappy, rather than deal with a lawsuit). But I like having an LLC with it's own bank account and credit card for tax purposes. It gives me piece of mind that i have completely separate accounts for business expenditures that I can point to in case I were audited, even though my risks of audit are pretty low. That said, I probably wouldn't do it if I were paying $800/year.
throwaway123fd
Interesting article about this at https://www.wolterskluwer.com/en/expert-insights/piercing-th....
> "A court will pierce the veil only if a failure to do so will result in an injustice. This requires more than evidence that a creditor will not get paid. It requires evidence that the corporation or LLC was used in some way to perpetrate a fraud or accomplish some other wrongful purpose. For example, if the shareholders or members formed the entity knowing that they were not providing enough start-up capital to satisfy its contractual obligations, or intentionally moved the company’s assets out of a known creditor’s reach so that the debt could not be paid.
Actions such as those may be considered by courts as abusing the corporate or LLC form. For example, an Alabama court pierced the veil of a solely owned corporation that was hired to do construction work on a house. The shareholder testified that the corporation had no money when the contract was made, that she made no attempt to make sure the corporation had enough money to complete the project, and that she and a friend used the corporation’s bank account – which consisted only of the funds from the plaintiff - for personal purchases at jewelry and sporting goods stores, car services, restaurants, and more."
hellofunk
> If you spent $1,000 on servers and your website made $10,000, then you’ll only pay taxes on the $9,000 in profit.
I wonder if this is correct. Many places require you to deprecate assets such as computers over many years, so the deductions are not all taken out of your profit the year you buy them.
Sounds like this article is conflating the legalities of setting up a business with the accounting of operating one, two different things.
bennylope
> Many places require you to deprecate assets such as computers over many years, so the deductions are not all taken out of your profit the year you buy them
It's likely that in some accounting regimes you have to to this, but in my own experience with a small business in the US, multiple accountants have simply depreciated assets like our computers immediately. When I originally questioned this our CPA said we could depreciate it over several years but it wasn't necessary in our case (small enough [asset] value and lifetime) and not worth it.
As it stands I imagine if someone is spending $1,000 per year on "servers" these are non-depreciable cloud service expenses.
coolgeek
It depends on what "spent $1,000 on servers" means
If you bought (and own) servers, you must depreciate and amortize them. These are capital expenditures, aka capex
If you rented servers (e.g. AWS, GCP), you deduct the entire cost when it is incurred (or realized, depending on the details). This is an operational expense, aka opex
jeltz
Depends on your jurisdiction but in many places you are allowed to instantly depreciate small assets, but not allowed to do so with more expensive ones.
vmception
sole proprietorships and other unincorporated ventures are getting a lot more respect and seamlessness lately!
the stimulus programs specifically included them and the SBA asked no questions
you do still want the liability protections, more disciplined separation of assets and accounting by having an incorporated name, and deterrent to people looking to sue, alongside additional levels of anonymity if you choose which can further deter potential creditors
they can also make elections to parallel regulatory or tax regimes, which you don't want to alter on your personal body. such as election 475 for active traders, converting capital gains and losses into ordinary income allowing for unlimited tax deductions on losses, instead of the default status for capital.
or setting up "blocker" corporations in other jurisdictions to help other people avoid onerous default tax regimes.
poulsbohemian
My partner and I just had a very similar conversation as she has several business ventures that she could continue to conduct as a sole proprietor, or she could form a corporate vehicle.
My thinking is - if you are engaged in an ongoing concern, especially if it is responsible for your livelihood, it makes so much sense to explore incorporation of some variety. This could be for no other reason than to split out business vs personal finances and records. As you explore various financing, tax, and legal scenarios though, the cost to form and keep an LLC (or then choose S-corp taxation...) make it completely worth the administrative overhead.
vmception
I incorporate like I’m unwrapping candy.
Second nature to me. Not that costly of a “hobby” and I’ve let them go delinquent temporarily if I have a disruption in income.
I’m often sitting down at a local bank branch opening a new account for one.
But I would also say consider Transferwise for business bank accounts. Super easy and you can get Euro SEPA region accounts for your US entities as well. (Without Transferwise update, this is actually hard for American citizens but it might not be something you ever encounter.)
I never do a local/“foreign” llc filing unless the state is fining me to do it.
Can’t really relate to the idea of debating to incorporate. I know the unknowns can be daunting but sole proprietorships are lazy.
unishark
Indeed anyone self-employed, full-time or part-time.
A LLC just (hopefully) gains you liability protection and perhaps a bit more legitimacy, in return for a big fee in California.
themodelplumber
*For single-member LLCs. In other cases it may take your CPA all of five minutes to show you the financial math as to why it's a wise move.
therockspush
the value of the llc or s-corp is the corporate veil. whether or not thats worth the $800 annual charge in CA, on top of other inconveniences, is the question.
inoffensivename
You also need to file a California Form 568 tax return with the Franchise Tax Board and pay the $800 annual tax whether or not you have any income, or you get a big fine that increases every month you don't file...
Ask me how I know :)
xur17
> pay the $800 annual fee whether or not you have any income
Really? In the 2 states I've lived in, there is no annual fee for LLC's. I'm curious what the reasoning behind having a fee that large is.
nkozyra
I'm surprised. I've had two in Florida and both had annual report fees ~ $150.
But if you don't pay your LLC just goes defunct. Making it a mandatory fee you can't escape kind of flies in the face of the whole point of an llc
abi
Basically, because CA can get away with it.
Consultant32452
In my state (not California) I have to file paperwork with the state on a yearly basis to confirm the status of my corporation: still active, any changes to the board, etc. There is a fee associated with this as well, though it's far less than $800. If you fail to do this, they just dissolve your corporation.
athms
California is the same, the Statements of Information must be filed annually with the Secretary of State and subject to a filing fee (separate from the franchise fee).
awb
Because governments are monopolies, they can charge monopolistic prices. The only way to not work with them is to physically move your permanent residence. That's a pretty deep moat.
throwaway0a5e
And the worst offenders will take potshots at you on your way out. NY, CA and other states specifically try and extract extra tax revenue from people who said "screw it, I'm out" but didn't do a good enough job documenting how out they in fact were.
bmiller2
If California can tax it, oh they will tax it.
ende
Unless it’s land that wealthy people owned before 1967 and don’t want to pay taxes on.
m463
tax what you want less of.
gogopuppygogo
Please call them by their chosen name “The Peoples Republic of California”
m0zg
To get people to move to Texas and free up the real estate. /s
throwaway0a5e
>To get people to move to Texas and free up the real estate. /s
See also:
"To get people to move to Texas and create CA's regulatory environment there."
poulsbohemian
What states are these? I've had fees in every state I've every formed an LLC in and/or been a foreign corp in.
jccooper
https://www.llcuniversity.com/llc-annual-fees-by-state/
shows some 9 states with no annual fee.
throwaway0a5e
>I'm curious what the reasoning behind having a fee that large is.
The fee is just one small part of a litany of compliance hurdles. The purpose is to keep the small guy under the table so that he can be squashed like a bug (by a lawsuit and/or the gov itself) if he F's up.
I'm sure they have some grandiose "think of the children"-esque language they do to justify it but as someone who lives in a similar regulatory environment the practical effect is that businesses either start with lots of investment[1] or they stay as under the table as they can possibly be.[2]
[1] either capital investment, like a facility and fleet of trucks, or time investment in the status quo, for example by a white collar professional (like a PE, lawyer or accountant) spending years working under some other business and building a reputation before striking out on their own or a tradesmen getting a professional license that requires years in a field. Sometimes there's a hybrid approach where you do your 9-5 for someone who's already made the investment and do side gigs to build up a customer base and then at some point you "go legit" and start your own business.
[2] And they either stay small or try and slowly amass the capital to start an above the table business.
tyoma
Soon to be free for the first year: https://www.nolo.com/legal-updates/california-extends-first-...
simlevesque
how do you know ?
inoffensivename
:)
I forgot to file one year (still paid the $800 on time) and got hit with a $500 fine that there was no way around.
That LLC made -$1300 that year.
ryandrake
Yea similar story. Had a partner and thought we would do a startup. Wanted to be all official so formed a LLC in CA. At the end of the year we had no revenue, and just some source code we had been plugging away at for the year. So our biggest two expenses were: $800 “standard fuck you” tax from California and about $400 to a CPA to write “$0” on a bunch of federal and state tax forms. After a couple of years of that we decided what we were working on was an expensive hobby rather than a startup and dissolved.
donw
I’ve incorporated in CA before. Top poster is correct.
simlevesque
I just asked it because he asked us to, I trusted him.
la6471
The absolute horrible thing about forming a Llc in California is the $800 FTB tax, that you have to pay irrespective of wether you have any income or not. This is really discouraging for any individual who is trying to start a business and is unsure of the outcome in the initial years.
charliepark
Also, it’s on the calendar year, not a rolling 12-month calendar. And it isn’t prorated. File your paperwork in early December? That’s $800 now and $800 in a few months.
Wait until January if you’re close to the end of the year and can afford to hold off.
caseyf7
I’m sure they do this on purpose, but if you read the fine print you don’t have to pay the tax the first year so you do get some time to figure it out if you incorporate early in the year.
juandazapata
That’s ~$67/mo to stay in business. I don’t see how this can be considered a horrible thing.
ashconnor
In the UK I paid a £13 a year to file accounts online to keep my dormant company running.
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mdorazio
When you're a very small business losing money the first few years of operating and California sticks you with an $800 bill on top of local taxes that are also levied regardless of income (business personal property), it's a giant slap in the face that makes you want to move your business to pretty much any other state.
athms
Then move. But remember, if you do business in California, you must still pay the franchise fee if you have a company that is NOT a sole proprietor or general partnership. Incorporating in another state will not save you, you must register with Secretary of State as a foreign entity.
ThisIsTheWay
Not quite. It's $67/month to just be able to try to stay in business. What benefit does that tax provide to start-ups, and why isn't it a function of the product the business produces instead of the flat rate that's imposed?
s1artibartfast
Probably not much for a brick and mortar store or a software consultant, but think about the vendors selling pizza or hotdogs on the street.
Alternatively, if you are involved in a few startups with losses, it can add up really fast.
revel
Not a lawyer but been through the incorporation process a few times: get a startup lawyer and commit to spending $2-5k just on legal fees in your first year. Each patent you want is $20k so you should probably not waste your time or money with one unless you're damn sure you need it and it's essential to your business.
If you screw up the paperwork it will prevent you from raising money or work with others and kill your business. Honestly, I know it sucks to have to pay money that seems unrelated to your startup, but you'll pay it back many times over and have to set things up properly anyway
jjeaff
Ya, we hired a top tier SV firm. They just used their own fill in the blank forms like you would get from legal zoom. And I even had to make corrections and send it back multiple times because they got the share numbers wrong and forgot to replace multiple mentions of the last company they used the form on.
Stratoscope
I have a California LLC and wish I didn't. It has been nothing but an albatross around my neck. I am almost certain I will shut it down at the end of this year.
Look, if you're reading articles like this one, don't do it. Just don't do it. Get competent legal and accounting advice first.
I formed my LLC four years ago when an interesting contracting project came my way. I'd worked as a 1099/Schedule C contractor in the past, but this client wanted me to have an LLC. OK, no big deal.
Then it turned out they also required the LLC to be taxed as an S Corp. No big deal there either, it's a simple IRS form to make that election.
Now guess what? You have to start filing 1120S corporate taxes plus the California equivalent. All the LLC/S Corp income flows right through onto your personal tax return, but you also get to get to file 940 and 941 payroll tax forms and the state equivalents.
And whether your LLC is taxed as an S Corp or not, you have to pay the $800/year California minimum tax on it. Yes, even though the LLC/S Corp really has no net income of its own (as it all flows into your personal tax return), you will owe that $800/year. Even if you create your LLC in another state.
Do not try to do this yourself. You will get it wrong and will pay many thousands of dollars in penalties as I have.
I finally realized I would be much better off just working for another company and letting them deal with all these headaches. They have an entire team to deal with it! If I had a time machine, I would have stuck with regular employment instead of thinking of myself as an independent business.
Forget about the fabled "corporate veil". If the IRS and FTB decide they want their money, they are going to get it.
If you do think this still sounds like a good idea, you must use a payroll service to pay yourself. After my initial fiasco of trying to do it myself, I started using Gusto [1] and they are pretty great.
For filing the LLC itself, I used SunDoc Filings [2] and they are really good too. They helped me on very short notice when I made a mistake on my LLC filing that would have caused it to be rejected.
But really, think twice, or a dozen times, before you open this can of worms.
Sorry for all the italics. :-) But this is something where I have some painful experience, and if I can help steer people away from it I hope it will be helpful.
jameslk
I have a California LLC too. It's not any harder than the steps explained in the article. Certainly don't form an LLC unless you need one. You'll know you need one when you need one.
> Now guess what? You have to start filing 1120S corporate taxes plus the California equivalent. All the LLC/S Corp income flows right through onto your personal tax return, but you also get to get to file 940 and 941 payroll tax forms and the state equivalents.
This not true of all LLC's, just corporations. If you're forming a small LLC, especially a single member LLC, you can create a pass through entity that avoids all of the ceremony you're explaining. Mentioning all this makes it sound like it's obligatory to establish a corporation when you form an LLC, but that was only necessary in your specific case (probably for the company you were trying do business with to avoid AB5).
Stratoscope
That's a really good point, thanks for mentioning it.
Looking back on this, if it had been just an LLC it would have been no big deal at all. It would be a "disregarded entity" with ordinary 1099/Schedule C income, no different from any of my previous clients, with an easy tax return like the ones I'd done many times before.
It was the S Corp election which this client required that really messed everything up.
In hindsight, this truly was the proverbial "client from hell". It was an interesting project, albeit quite an experimental one. I got paid for only a week of work after spending a full month on it, and then I got the ongoing heartache of the S Corp nonsense to boot.
Thanks for pointing out the distinction between the LLC and the S Corp.
jameslk
It definitely sounds like a terrible client, especially making you jump through these hoops just to work with them. Sometimes it's hard to know until you've started working with them how the relationship will turn out. A client forcing you to form an S-corp and put yourself on payroll doesn't exactly establish trust and is probably a bad sign of things to come.
Despite this, I wouldn't let it sour your view of self-employed work. I was an independent contractor for 6 years and then started a more formal business after. The freedom of picking where, when and how you work, who you work with, how much you'll charge, and most rewarding of all, building and owning your own thing, can be very fulfilling. Maybe you had other reasons to desire employment again, this is certainly not for everyone, but if it's all interesting to you, it's worth it just for the personal growth.
SoylentYellow
Why did your client care about how the government taxed your LLC?
ISL
Seconded. Filing the 1040 is straightforward compared to the 1120S, and the minimum taxes are real (my experience was NYS, with incorporation in NH for historical reasons).
The 1040 instructions are maddening but nigh-complete. A thoughtful person with enough time on their hands has a prayer of figuring out even relatively subtle tax issues.
The 1120S instructions as recently as ~2015, on the other hand, feel like vague guidance. If the phrase, "Write down your income, write down your expenses, now write down your tax. Sign that you have made no mistakes under penalty of law." makes you nervous, consider expert advice or an arrangement that avoids forming an S-corp.
The state forms are generally dependent upon the federal ones, so if you make an error on the federal form, the error will flow through to the state (which may have similarly vague instructions).
If I ever need to form another corporation, I will absolutely seek professional advice and hand off the filing to a trusted CPA. @Stratoscope is doing the right thing in using plenty of italics.
gamblor956
The calculation of business income tax really is that simple...
It only gets complicated of you want to make it complicated.
ISL
Perhaps I missed it on my annual reads through the instructions, but I cannot recall seeing a statement: "This is the definitive path to figuring your tax." For the personal income tax instructions, that pathway is clear for almost everyone.
jiveturkey
> Do not try to do this yourself. You will get it wrong.
I did it myself and got it right? I closed my LLC last year, not for reasons related to managing the LLC itself.
It's not "hard". It just requires a lot of knowledge of process and filings required. Most folks are best using a CPA to handle it.
It is absolutely best to contract under an LLC or S Corp umbrella, vs personally. You need the liability protection. Perhaps not as much for software, I suppose. But if an average plumber / salon owner / painter / tradesman can get it right, so can you.
> you must use a payroll service to pay yourself.
you don't need to. it's way easier to do the payroll taxes, so you absolutely should, but it's not a hard requirement.
but you don't need to be on the payroll at all. you can take a draw, or take distributions instead. there are tradeoffs for all 3 methods.
> Forget about the fabled "corporate veil". If the IRS and FTB decide they want their money, they are going to get it.
The corporate veil isn't about taxes, at all.
c17r
I've never run into a case where the client cared how I reported my taxes. How would they even know? Did they give you a reason for this?
Stratoscope
Thanks for asking. They were a California company, and this state has gotten very strict on such things, doing their best to shut down the ability for people to work as independent contractors. It really sucks, but you can't fight city hall.
The idea was that the LLC/S Corp would give my client some protection against anyone claiming that the client would owe employment taxes on what they paid me. So I had to be my own corporation paying myself through a payroll service, to make sure the state and the feds would get their cut.
Put more simply:
"Nice business you've got there. Be a shame if something happened to it."
arrosenberg
I think that was more about the client having a hang up than the state or AB5. You either pay payroll taxes as an S-Corp, or you pay self-employment taxes if you take pass-through taxation. Regardless of which taxation method you selected, the company would still be on the hook if you later complain to the Department of Labor that you were misclassified.
gamblor956
You clearly misunderstood something because that's not a CA law and that isn't how a consultant or contractor would prove their legal entitys existence to a client.
ende
> I finally realized I would be much better off just working for another company and letting them deal with all these headaches. They have an entire team to deal with it! If I had a time machine, I would have stuck with regular employment instead of thinking of myself as an independent business.
It’s almost as though that is all by design, put in place by state legislators who are owned by big corporations that want to keep their primary labor pools enslaved under the W2 regime.
I think all the labor / socialist parties may have gotten it wrong - the worker’s revolution would never be realized through labor unions etc, but rather by organizing incorporation and all the benefits it confers upon the individual. Let every man, woman and child be their own corporation. Wouldn’t that be a different form of capitalism to behold.
gamblor956
Somehow thousands of people can form and run CA LLCs and S corps just fine without issue.
If you can't handle a little bit of paperwork you have no business trying to run a company.
jonsno56
Crap. I actually missed 1-2 years of paying the $800 franchise tax because like a lot of other people on this thread, it’s just used for hobbies, makes no money, and lies fallow 99% of the time. I’ve never gotten a fine in the mail for this though. Does anyone know if there’s some sort of online portal or phone number that is the best place for me to pay all the taxes and fines and make sure that in their records I am even?
unishark
Perhaps you want the website for the secretary of state. You can also look up any business and see all the public forms plus the address they're using (for those notices you're not getting).
flowerlad
You may also need a registered agent for "Service of process". Costs $100 per year. Without it you risk default judgement in case of a lawsuit. https://www.legalzoom.com/articles/what-is-an-agent-for-serv...
feross
You can just use your personal mailing address and check it for mail.
closeparen
This puts your name, address, and association with your company name into public record. Not recommended if there is >0 probability of attention from internet crazies.
Cactus2018
You can act as your own Registered Agent for a corporation or LLC as long as you have a physical street address in the state where your corporation or LLC is formed.
The actual corporation or LLC being formed, however, cannot name itself as its own Registered Agent.
gamblor956
S corps are generally preferable to LLCs if you are eligible to form one, but it also depends on your goals, i.e. if you intend to raise money, you need an LLC or C Corp.
I formed an S corp for my personal protects for tax reasons. I also used legalzoom, because it's good enough for most small businesses. (And even big ones; Panda Express is an S corp.)
shrimpx
Just curious, what are some of the tax benefits you gain with an s corp?
jccooper
Chapter S election (which an LLC can do, by the way, it's not a particular type of entity) does pass through taxing, and has a thing where the "profit distribution" of the corp, after paying shareholders "a reasonable salary", can be distributed without self-employment taxes, just regular income taxes. So you can save some 15% on some portion of your income--if you have an income larger than whatever you may be able to justify to the IRS as a reasonable salary. Other options may make sense based on how much money is kept in the company, if you have passive investors, how much money you're making, how much work the shareholders do, etc.
siberianbear
I also don't understand the parent's comment. An LLC can make a tax election with the IRS to be taxed as an S-Corp.
flowerlad
It is best to have at least two persons in the LLC. If there is only one owner, then you have less protection as the "veil" can be "pierced". https://www.nolo.com/legal-encyclopedia/piercing-the-limited...
feross
From the article:
> if you form your small business as an SMLLC, and observe a few basic rules (such as keeping business finances separate from personal finances), you should be personally protected from most kinds of business liability
Single-member LLCs which are run properly still get liability protection.
flowerlad
See: https://denhalaw.com/can-you-protect-yourself-with-a-single-...
Courts in a variety of states have “pierced the veil” of a single-member LLC from the outside and have held that it is not a separate entity and thus may not be used to protect the assets of the LLC from the creditors of the member.
You get liability protection, yes, but not as much as you would if you had one more member. The veil can be pierced for various reasons, so to reduce risk you want to minimize those reasons as much as possible.
fountainofage
I think this is interesting in that I don't know many people who view LLC's protections this way. The classic example is that if your rental property is in an LLC, then your tenants can't win a suit and get to your own personal house.
These examples of piercing the veil are from the other direction - a personal suit getting access to the LLC assets... Which sort of makes sense - the alternative would be the court ordering the seizure of my assets - which would be my ownership stake in the LLC. So in their example, I'd still expect to lose my ownership stake in my LLC by asset seizure even if I was in a multi-owner LLC... Or had stock in an S-corp.
formercoder
Piercing the veil can occur for many different reasons, including some as simple as improperly kept notes of annual meetings. Consult with a lawyer to be sure every formality is followed.
feross
This is incorrect. In California at least, LLCs do not need to hold annual meetings.
pnw_hazor
It is a duck test. The more your LLC operates like a "real" company, the harder it is to pierce the veil.
formercoder
Precisely why I said it’s complicated. Just make sure your lawyer tells you if you’re doing everything you need to.
kogus
In some states, all you need is a federal EIN, which you can get free on the IRS site in about five minutes.
https://www.irs.gov/businesses/small-businesses-self-employe...
I live in SC, and you don't even have to inform the state that you formed an LLC. If you do want to, its about $100 and takes another online form.
The idea that you would need a lawyer is absurd.
throwaway0a5e
Putting hurdles up (like $500 LLC fees) in front of the various things that "legit businesses do" is a form of regulatory capture.
Basically the goal is to force businesses to choose between heavily buying into the status quo or giving government power of arbitrary enforcement over them. The licensed plumbers don't want all the journeymen who haven't spent years getting a license but can install a toilet just as well undercutting them and stealing their gravy business. By imposing regulatory hurdles at every step of the way you keep those "I'm not quite big enough to go 100% above the table" businesses under the table you keep them on the down low and you keep them from affecting regulatory change. By the time those journeymen plumbers have licenses of their own and can be 100% above the table they feel entitled to the gravy and don't want to change anything. (I only picked plumbing because it's a good example in my state, there's plenty of others).
happyjack
In my state it's $100 to file, and a $50 fee each year (if assets are < $250,000). If you're a single member LLC, you don't even have to have articles of incorporation. You can even file a sketchy shell company and pay a registered agent to use their address. Also, no state taxes either. It's about a 10 minute process.
jaja99
Can someone tell me how to form LLC in WA state and not publish our home/business address? We will be working from home, but we don’t want our home address to end up in public search records. Any help or recommendation?
poulsbohemian
I know (because I saw it recently) that if lawyer assists you with forming a C corp in WA, their address can be used and they become an agent for your business, IE: they potentially get all your renewal paperwork, etc. I'm assuming if you had a lawyer form your LLC that they could do the same. That said - I've had a WA LLC for decades, my partner has formed LLCs in WA, etc... it's trivial to do yourself and fairly harmless to include your home address. In the month since she formed her most recent, I think we've had two pieces of junk mail. I did a search with the DOR a few minutes ago - yes, the address shows up for my business but not for hers, so who knows whether your address would even be published?
poulsbohemian
Get a mailbox at a UPS store or similar mail drop service. Easy peasy. This gets around the "No PO Box" requirements that many government forms have because the mail drop service will have a storefront address. So you end up being 124 Mainstreet Box 47.
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The article claims as a second benefit of an LLC:
> 2. Tax benefits. You can deduct qualified business expenses from the total income of the business. Here’s a simple example: If you spent $1,000 on servers and your website made $10,000, then you’ll only pay taxes on the $9,000 in profit.
You don't need an LLC to deduct such expenses. Even sole proprietors can deduct business expenses against business profits.