| I've formed and run an sole member LLC, S Corp and C corp. Sometimes I get people asking me about forming a company to do EBay, Amazon FBA, and other side gigs. Here is basically what I tell anyone who asks (cliff notes version), off the top of my head: 1. If it's not making money, it's a hobby. 2. If it's making a little bit of money, don't form an business entity. Just do it as a sole proprietor - this is basically the easiest thing to do. Just open a separate bank account for the business and Schedule C on your tax return. Save ~25% of income in savings account for self employment taxes and taxes. Converting to an LLC, S Corp, etc., is always a possibility later. 3. Your choice of business entity will have consequences down the road that your attorney or accountant may not explain to you up front. For example, I did most of my consulting through an LLC on the advice of an accountant who convinced me to give up my S Corp. When my wife and I went to purchase our first house, they convinced me drop off of the mortgage application because they didn't like the fact that I was "self employed." If I had kept the S Corp, I would have W2 wage income and they wouldn't have batted an eye. 4. The rules regarding business entities vary state to state. Some states will allow a single member LLC and single owner S Corp; others may not. Make sure you understand your state laws and the taxes. Some states have an income tax; others have franchise tax. You can form the corporation in another state, but you will likely have to register as a foreign corporation in your state. For a few years my corporation was chartered in Delaware, and I would register in a state when I had business activity there. 5. The IRS has no sense of sympathy or humor when it comes to payroll taxes. State governments are even more fanatical about getting their money, on time. Penalties can be severe. I was depositing payroll taxes quarterly and was surprised when they wanted me to start depositing monthly. They notified me with a 17% penalty. 6. Understand that filing a tax return can trigger the requirement to keep filling out tax returns even if you don't owe anything. If you shut down the business, make sure you spend the time and be persistent in closing tax accounts or you will get notices for years. Don't trust it when a government employee says the account will automatically get closed. 7. Understand that with an S Corp or LLC you will have to do the business tax return first, before you do your own tax return. If you are an minority owner of a corp, make sure they get the tax returns done on time and you won't get surprised. Once you get surprised with a $20k tax bill... 8. In some cases a C corp can make sense, regardless of what everyone says. 9. Make sure you setup a proper retirement account and make contributions. This can payoff over the long term, even if you business isn't super profitable. Make it a priority. I have plenty more, but that's a few thoughts. |
4 years later me and my partner get a letter from the state comptroller wanting to know why we hadn't been filing. We were looking at several grand in penalties. When we went to the audit thankfully we got an understanding auditor who was able to close the account retroactively and remove the penalties.