Inc. yourself or Sole proprietorship ????

[zorrosrk]

I think I have made that mistake... talking about a snap decision...BUT guess what??? I didnt regret it so far...


I gotta do some stuff for my business like insurance and might be incorp-ing myself because of liability purposes. This was the main reason I started the thread.

I am really greatful to all the guys who help out each other here... for their inputs on this "simple " issue.

I'm off to my accountant to see what she thinks about getting in there... since I dont have a lawyer she should do it for now.
On another note I dont trust lawyers they always try to ripp you off... hehehe
I dont blame them this is what it's all about.


yours truly the
MASKED BANDIT


J

[Agent_Coop]

Exactly, when we took the Proposal Kit contracts and documents from US law and rewrote them to conform to UK/CAN/AUS law...they exploded from a standard 3 page contract in the US to up to 9 pages (UK).

The user can still determine what is applicable to their situation, but in order to be complete & valid...the US contracts need a lot more for International consideration.

Most people just pull some verbage off the web..

[DrumDesigner]

As a graduate accounting student (and part time webdesigner), I personally believe that incorporating is a good decision. However, filing as a "C" corporation is not really needed for the level we're talking about here. "C" corps are subject to double taxation, both at the corporate and individual level, plus they may be exposed to a lot of regulatory red tape (compliance with corporate code) that may be counter-intuitive to the whole process.

An "S" corp is characterized by giving you the advantages of "limited liability" feature that is an advantage of a "C" corp while enjoying the tax advantages of a partnership (the partnership acts as a "conduit" or flow through and each partner is taxed at the individual level).

An LLC or "limited liability corporation" may be even a better choice for designers. This is characterized by having the traits of an S corp without all the regulatory requirements that have to be met. I did a site recently for a private investigator and he recently switched from a sole proprietorship to this form. The great thing about the LLC is that an operating agreement denotes "members", not stockholders and the there is a great degree of flexibility in the criteria and specifics defined when drafting the agreement. This lets you design the form of business around your central activity and purpose and even special circumstances. For instance, let's say that in the agreement, there is 30/70% ownership between two members. The profit sharing could be 50/50 despite the ownership allocation. This type of thing could not be done in a C or S corp.

I'm pretty much a freelance webdesigner, but if I was going to actually file for a business type, I would pick the LLC. For the size of your business and your associated needs (protection from seizure of personal assets, e.g. limited liability), then it's the way to go. Plus, you'll save a lot on all of the accounting work to be done when you file your return. I'm not a CPA yet, but I'm a graduate accounting major, just so you know. I sit for the CPA exam in 2003. I hope this helps....for more info on business forms and regs, just go to http://www.irs.gov They offer a lot of free advice....

[tpnovak]

There seems to be a little confusion on the whole Sub-Chapter "S" scenario here in the US. Keep in mind, that it is still necessary to setup your company as a traditional C-Corp first. The Sub-Chapter "S" Designation is applied to the C-Corp by the IRS, once it has been determined that you meet all of the requirements to actually receive S-Corp Status.

Before choosing a route (C-Corp vs. S-Corp vs. LLC) be sure to consult with both a CPA as well as an Attorney. For example, some states require that you have more than 2-3 persons running the company. The rules, regulations, filing fees and procedures are different for every state.

I would also suggest bringing up the whole concept of "protection from liability" with your professional advisors. In general, the corporate veil isn't quite as iron clad as one would think.

Incorporation for protection purposes alone doesn't make a whole lot of sense to me. Especially when you consider the additional tax and paperwork burden (e.g. Minimum Franchise Tax Fee in CA is $800 per year). If you are concerned about limiting liability, why not look into E&O business insurance (Errors and Ommissions)?

[DrumDesigner]

When I mentioned that I believed that the LLC status would be the probable best choice, I was assuming that we were talking about a one or more individuals who are moving from a freelance or sole proprietorship situation to another form with limited liability as one of the key features (one of the key focuses of the original intent or desire of this thread).

As far as the corporate veil, it obviously can be pierced. If a business fails to perform under a express contract, the corporate veil will not protect them. There are other scenarios as well where this can happen. If you do fail to perform the duties or services you've been hired to do, or do so in a negligent manner, NO form of business structure will help you.

It's my personal opinion, however, that it's makes a lot of sense to choose the LLC form (or other forms depending on your situation) that has the limited liability feature. As I said before, I designed a site for a private investigator who recently went to LLC status and the limited liability feature was the main reason he did. I understand that the nature of his business is quite different from that of a web designer, but the central theme is still apparent; protecting your personal assets from seizure in the event of a lawsuit or legal fatality.

I may be wrong, but while getting the insurance may be a quick and cost effective solution with minimal paperwork compared to the LLC consideration, it may be subject to certain restrictions. I think the best thing to do (as it has been suggested before) is to do a cost/benefit assessment and see what is more appealing and beneficial to implement for a given situation. The paperwork involved with an LLC is not that much of a hindrance if you consider the amount of benefits of utilizing that business structure (mentioned in my earlier post).

If an individual feels that their business situation is better without existing as an LLC, than that is their own choice. If it was me, I would be an LLC. But, I'm an accounting graduate student studying for the CPA exam, so my reasoning is probably loaded with bias. I leave it up to the individuals reading this thread to make their own decision and hopefully any information I, or any others here, have submitted is helpful. Seek out the IRS on this one if you want some good advice, they CAN give that at times! Also, are there any actual CPA's here at Flashkit. Next year, if all goes well, I will be one, but is there anyone else with this background who wants to add to the discussion? I'm really enjoying this thread because it's a very important topic for all of us.

[tpnovak]

Originally posted by DrumDesigner
I may be wrong, but while getting the insurance may be a quick and cost effective solution with minimal paperwork compared to the LLC consideration, it may be subject to certain restrictions. I think the best thing to do (as it has been suggested before) is to do a cost/benefit assessment and see what is more appealing and beneficial to implement for a given situation. The paperwork involved with an LLC is not that much of a hindrance if you consider the amount of benefits of utilizing that business structure (mentioned in my earlier post).

Actually, the price of E&O insurance will be right around the cost of forming your LLC. If you are in California, you also get the pleasure of paying tax on your gross receipts. Minimum is $800 per year, but it VERY QUICKLY rises to $12,000+ per year. Also, I can assure you from history, that a good E&O policy is going to protect you FAR better than "limited liability" entities.

Here's the simple real world example I use when consulting with small businesses:

You perform services for Company A, and they decide to litigate for whatever reason. Just because you are an LLC (or other similiar form), they can still file suit and you will be forced to pay the outrageous legal fees to defend your position. In reality, not many small companies could survive this attack alone. However, with E&O insurance, the entire cost of your legal defense is generally covered by the policy.

Now, let's take it a step further. Company A files the lawsuit and so then you simply close your business doors and say "yippie, I'm safe!", right? Not so, again, Company A can still file the lawsuit against you personally. Now you are selling your personal assets defending your claim that you are covered by a "Corporate Veil", which in the end could very easily be pierced.

I can definitely show you more examples of where your insurance is of more benefit than the entity that you have chosen. My point here; don't just rely on your choice of business entity for your protection - you'll more than likely get more milage with proper insurance.

[JabezStone]

I wanted to bump this thread up, due to its value to web developers (service providers).
Thanks Tony, for the suggestions, and everyone else who contributed to this thread.

[erova]

furthermore, insurance is cheap.

to have a million dollars of liability insurance (that's pretty much the defacto minimum standard here in the states) costs about three hundred bucks a year, with ridiculous amounts of coverage...

[tpnovak]

Originally posted by erova
furthermore, insurance is cheap.

to have a million dollars of liability insurance (that's pretty much the defacto minimum standard here in the states) costs about three hundred bucks a year, with ridiculous amounts of coverage...

Yes, General Liability Insurance is pretty inexpensive, but your General Liability Insurance is more than likely not going to cover your work product - It's more for situations like a "slip & fall" on your premises. However, Errors & Omissions Insurance (which will be more pricy) will cover the work product. Just want to clarify the difference. In general, and depending on the circumstances, a business should carry multiple policies:

General Liability Insurance
Errors & Ommissions Insurance
Employee Medical Insurance
Employee Disability Insurance
Theft Insurance
Fire Insurance

...To name a few of the more common

[erova]

you're right Tony, and I should have clarified exactly what my 300 was going to...

my policy is actually a bundle of insurance products that, for lack of a better term and one that will be easily identifiable, is pretty much an extra value meal for independent tech consultants.

the provider, hartford insurance, required that their minimum premium be at least 300 dollars...in my instance, the million dollars for liability would have only costed me about 150 bucks, and therefore i needed about 150 dollars of more insurance before i could get any at all...for 300 dollars this tech bundle included my liability, theft, fire, and insurance targeted to just tech consultants, such as excessive down time, server crashes, virus infections, hacks, etc.

needless to say, this is a sweet deal, and i don't know if anyone qualifies for it, so i'm not saying this is necessary or perfect for anyone and everyone, but it certainly met my needs...

[erova]

by the way, that policy covered my computer's virus infections...

i know some wiseass is already getting ready to tool on me...dag.....