Should I form an LLC?
I am in an interesting position....
About 4 months ago I put together a website that discussed/showcased my web/elearning development skills, in hope to start advertising locally (craigslist and the like) and hopefully get some side business. I am employed full-time so this was strictly a part-time thing. Right away I started getting work. Nothing too big, but fairly steady and mostly small projects. I've also started working as a sub-contractor for a web designer local to me.
Anyways, I've been doing all this 'on the down low' in terms of taxes. At least I think I am. We're not talking lots of money at this point so if I had to pay the taxes it'd be okay.
Now I'm starting to get inquiries for larger/steadier projects, from previous and a new potential client (for a large media firm with a very impressive resume). So I'm thinking I maybe should go legit and form an LLC. I've done some very minor research and it appears to me that, for tax purposes, the LLC is irrelevant - I just pay the taxes at the end of the year by claiming the income on my own personal (actually, joint - I'm married) 1040 return. So my question is - what's the point of bothering with the cost/hassle of an LLC? I'm doing Flash development for the most part - no one is gonna get injured or die or lose money from my work. I'm not doing anything that'll take down production servers : ) So I can't see getting sued. So, should I bother with the LLC thing? (I'm saying LLC but that's because I've only seen people in similar positions going with an LLC instead of Sole Proprietorship, Corporation, etc).
We're not talking lots of money at this point so if I had to pay the taxes it'd be okay.
Well, technically, Mark if you're earnings are over $600 on this moonlighting work I believe you already ARE supposed to be declaring this income and paying taxes on it. (NOTE I'm NOT an accountant -- along with NOT being a lawyer, so the $600 figure may be off.)
An LLC (Limited Liability Corporation) or straight incorporation can do more for you than protect you from lawsuits. It can make not paying taxes on expenses much simpler and less likely to be challenged by the tax authorities. It can also be a way of showing prospective clients that by virtue of being a company instead of just an individual you are somewhat more serious. OK, mostly it's the not paying taxes on expenses thing.
The long and the short of it is only a good, small business-oriented CPA can advise if this makes sense for you or not. Because there are legal and filing fees in the beginning, extra tax forms to file each year and therefore accounting fees which you might not otherwise have, making this decision is NOT a no-brainer.
For additional perspective on the advantages and disadvantages of going in business for yourself you might want to check out the article "To Be or Not To Be (self employed)" in the current issue of CreativeCOW Magazine. And while I know for a fact that the author has done some really stupid things over his career, some of what he has to say is valid. (The rest is pure nonsense, but perhaps amusing.)
Nick - I read your article yesterday and it is what has prompted me to really start considering the LLC thing and going 'legit'.
In terms of what I've made so far in the past 3 months it's only been about $1800. So it's a nice side business for me, a lot of that profit goes out the window if I start getting accountants involved. That said, if I get this very big-time client that wants to talk to me next week then it would probably definitely be worthwhile. I will look into it regardless asap. Thanks, and great article!
If you don't get set up with an accountant, you'll see a lot of things go out the window. The NUMBER ONE reason that small busineeses fail or the owner goes to TAX PRISON is because they thought that CPAs were too expensive. A CPA is only around $60 to $80 an hour. You've already made enough money to be in tax trouble. If you don't do this, some day you will be very, very sorry. Besides, you just wrote this on a public forum and where do you think the IRS gets their info on tax cheats?
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[Nick Griffin] "Well, technically, Mark if you're earnings are over $600 on this moonlighting work I believe you already ARE supposed to be declaring this income and paying taxes on it. (NOTE I'm NOT an accountant -- along with NOT being a lawyer, so the $600 figure may be off.) "
Actually, any income you earn is reportable - there is no threshold. So, even if you make $5 doing something, it's taxable income. Now, if $600 is your only income, you wouldn't have to file a return as your income would be less than the standard deduction and you'd have no tax liability. In 2006, the filing threshold was $8,450 for a single taxpayer ($5,150 standard deduction + $3,300 personal exemption). Nick, I think what you're thinking of when you mentioned the $600 is that that's the threshold for when someone has to issue you a 1099 if you performed services for them as a contractor. I'm sure the IRS would like 1099s issued for amounts much less than that even.
[Nick Griffin] "An LLC (Limited Liability Corporation) or straight incorporation can do more for you than protect you from lawsuits. It can make not paying taxes on expenses much simpler and less likely to be challenged by the tax authorities. It can also be a way of showing prospective clients that by virtue of being a company instead of just an individual you are somewhat more serious. OK, mostly it's the not paying taxes on expenses thing."
I'm not sure what you mean by "It can make not paying taxes on expenses much simpler..." - do you mean that it's easier to write off your expenses? Yes, any sort of business entity is less likely to have its expenses challenged, provided they really are ordinary and necessary for that line of business.
Another benefit to using an LLC or other business entity would be if your business is not making money. If you're losing money, the IRS may come in a say that your "business" is a hobby, and if that's the case, your expenses are only deductible to the extent of your receipts. If you've taken the time to go through the process of forming an entity, it's additional proof in your pocket that the activity is engaged in for profit.
To the OP: If you go with an LLC and you're the only member, then the entity is disregarded for income tax purposes and the income and expense are reported on Schedule C of the 1040, just like it would be if you were running as a sole proprietor. However, the LLC gives additional benefits like those that Nick and I have mentioned.
Whatever you decide to do, keep detailed records. I cannot stress this enough. Not only will these records help immensely if you ever get audited, but the more organized you keep your things, the less time your CPA has to spend figuring out what you did...
Sole proprietorship and LLC will both be subject to self-employment tax as well, so don't be surprised if half of your net income disappears in the way of taxes.
One more thing in regard to LLCs and asset protection... It is a common misconception that an LLC is bulletproof from lawsuits. There is a legal term referred to as "piercing the veil," that refers to a lawsuit being able to get at the individual behind the LLC/corp/etc. It is up to the individual to do their due dilligence in keeping the LLC/corp as completely separate as possible , i.e. separate bank accounts, liability insurance, etc. That way, in the courtroom, it doesn't just look like someone is trying to hide from "the law."
*disclaimer* I am not a lawyer, but have an LLC and have spent a lot of time managing it.