10 replies to this topic

[websage]

Here is another question for those among you who are more familiar with the trade law:

What are the pros and cons of freelancing vs formal business registration? What are the option for a small business or single proprietorship registration? -- In the US? how about other countries?

Thanks in advance,
Mitko

[don1]

I can only speak to what I know, and that is limited to MA. I will assume that using the term "freelancing" you are referring to being self employed, or sole-proprietorship. The main benefit of sole-proprietorship is the low start-up cost. An example would be the $10 registration in my city. The LLC is rather new to our Commonwealth. In MA we actually have a single member LLC statute. IRS regulations view LLCs as a partnership if there are two or more "members" and as a proprietorship if one. In other words, you would pay taxes as if it were personal income just as in a proprietorship (file your 1040 and schedule E). When it comes to lawsuits or personal liability the LLC provides protection to its members similar to the way corporations do to its board members (no personal liability). Alternately, a sole-proprietor must protect him or herself with insurances and other means (talk to your insurance agent and attorney for opportunities that might apply to you).

If considering which type of organization is best for you, you will need to consider character, growth and your exit strategy (among other things). These will influence what type of organization you will require (but that is another topic).

Cheers

[OldWelshGuy]

In the UK it is far more advantageous to incorporate, into a LTD company, this can be achieved for £50, and the laws have been relaxed with regard accounts being audited.

The tax benefits are great as a lTD company will not pay tax on its first £10,000 per year profits, also on top of that you have your personal tax allowance of £5,000 ish plus as i use my own car for company business i can claim back a tax free mileage allowance of £4,000 for the first 10,000 miles followed by £2,500 for each 10,000 miles thereafter i do about 30 k a year so this allows me to about £24,000 earnings before i start to pay any tax good old her majesties government i say.

As a sole trader i would not get any where near those breaks, plus i would be liable for all the losses and liability of the business. not good !

[SEO-Richard]

Old Welsh Guy (bet I'm older than you) - is it difficult to create a LTD company? I assume there's lawyers involved in it? Or is it possible to DIY?

[OldWelshGuy]

SEO Richard, here you go, http://www.uk-company-formation.co.uk/ you can do it all online for £50 no solicitors involved, not even a signature needed.

or youcan go to companies house directly but it can be a bit more troublesome and the cost is £25 http://www.companies-house.co.uk/

BTW it is possible to run a Ltd company with just one director and a nominee, but if you work for only one company then you will fall under the dreaded IR35 tax bracket but if you have more than one client you are exempt.

This was brought in to stop contracted individuals setting up an umbrella company thereby avoiding tax.

[torka]

When it comes to lawsuits or personal liability the LLC provides protection to its members similar to the way corporations do to its board members (no personal liability).

I've been told this isn't entirely true... (not the part about LLCs providing protection similar to corporations, but the part about corporations -- or LLCs -- shielding directors or "members" from personal liability).

Here's an interesting page I ran across on FindLaw with articles about Officer and Director Liability. Of course, many of those pertain to publicly traded corporations (subject to Sarbanes-Oxley in the U.S. and various other similar types of laws in other countries). Even so, directors of privately-held corporations may also be held responsible for things that they have personally done, even if it was done "through" the corporation.

And if you're an Officer of the corporation, as you must be if it's a one-person show, you run an even greater risk, since you have direct management responsibilities. And when your corporation is made up of only one person, you don't even have the recourse being made use of by officers of several large corporations who are on the hot-seat these days -- to wit, "it was all my subordinates and I didn't know anything about what they were doing..."

Which is all just a long way around of saying that you shouldn't count on incorporation as an impenetrable shield around your personal assets, and even if you are incorporated, you may still need to have business liability insurance that protects you as an individual (as well as business liability insurance protecting the corporation).

Which doesn't even begin to address the tax concerns. Corporations pay taxes as separate entities, which means that your profits could be double taxed (once when earned by the corporation and once when distributed to you, depending on how they're distributed). On the other hand (and also depending on how distributed) the tax rate may be lower than what would be available to you as an individual (sole proprietor).

This is the kind of thing that really can't be answered on a forum because there are so many variables. You absolutely MUST consult with both an attorney and a tax accountant familiar with your local laws and tax code to find out what form of business will work best for you.

--Torka

[don1]

...you may still need to have business liability insurance that protects you as an individual (as well as business liability insurance protecting the corporation).

Gosh yes, of course you would get insurance as any entity. We even get insurance for being board members of non-profits. The "protection" provided by creating an LLC, S-Corp or C-Corp is one of several layers of protection that should be used. Typically, the board members, shareholders or owners are protected from the liabilities of the corporation not personal liabilities or any negligence, misconduct or wrongdoing the person commits or supervises (even though recent events have forced some rule changes for the rest of us because a few abused the system - oops, where did that come from). When the corporation is small those liabilities sometimes carry a personal guarantee by a board member, owner, etc, thus making the rules as explained above a bit murky.

IMO the term "double tax" just scares people. Ideally, the corporation takes in revenue and makes a profit, thus paying taxes (even if you do not make a profit there are taxes to be paid). If you are an employee of a corporation (your own or somewhere else) you pay an income tax. The corporation is a separate legal entity. When the corporation does well enough that shareholders and/or investors benefit from added income at fiscal year end they must also pay taxes on that income. If qualified, creating an S-Corporation can prevent this "double tax" burden. The LLC avoids the corporate taxes much like a partnership or sole-proprietor does but the members still pay income taxes.

Each legal entity has its benefits. Again, personal style, planning for the future, structure (or lack thereof) all have influence on what type of business is best for you.

Note: this glosses over several years of college and what many people make a living by doing, in a post, online, by someone you never met

[samt]

If asset protection is the goal, opt for a Nevada corporation. Nevada keeps corporate records confidential from everyone but the IRS I believe. Unlike other places, where any joe schmoe can easily find ownership and all kinds of other detailed info about corporations. Also, NV allows bearer shares, it's the only state left that does I believe. I'm not in the SEO business so I don't know how serious any liability might be, or how important to protect your personal assets in the process, but NV is the best for that.

[websage]

Thank you very much for the answers!

[SEO-Richard]

Thanks OWG, much appreciated

[Bill Slawski]

You absolutely MUST consult with both an attorney and a tax accountant familiar with your local laws and tax code to find out what form of business will work best for you.

Also consider talking to an insurance agent. Small business insurance can be helpful, too.

In addition to helping you decide upon the most advantageous format for your business, those professionals can help you set up procedures and systems for tracking your earnings and recording your business decisions so that you are less likely to have problems.

If you're in the United States, the Small Business Administration has some great resources on their site, and can be a tremendous help. Here's a imagemap of the United States that can help if you want to find a local office:

http://www.sba.gov/regions/states.html

An online course on Starting a Small Business, which I like a lot, from a nonprofit organization explains a great many of the things you should consider when you want to explore the practical and legal aspects of running a business.