I’m beginning to work on developing my own business. I’m a little confused on the legal aspects regarding becomming INC or LLC. Which one is best and why? How do I technically/legally pronounce my business to be INC or LLC? Any other information regarding starting up a small carpentry business would be much appreciated.
upnorthframer
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Replies
Probably make a difference which state you're in. Which nobody knows, 'cause you haven't filled in your profile.
PAHS Designer/Builder- Bury it!
I actually live in wisconsin, but i plan on doing most of my work in minnesota.
The state of Minnesota will send you a free book, <A Guide to Starting a Business in Minnesota> that contains some information you may find helpful. You can request it online at http://www.deed.state.mn.us/bizdev/start.htmlThis book lists out some of the requirements of both structures for taxes, organization, reporting requirements, all of the fun stuff. I don't know what differs in Wisconsin, but I'd search for a similar publication on the state web pages.
this is a quesiton I'd leave up to your CPA (tax liabilities) and atty (legal liabilities).
Already have some good direction answers. Here in NC as well as KS where I used to live the state has some small business centers usually located at either College or Tech Col. They are supported by the Small Business Administration. Another source is score:
http://www.score.org/index.html
Generally in most states you have to register a corp or LLC with the secy of state. There are advantages to each of the business entity, you just have to see what fits you projected operation. I would guess that many here are sole proprietors and happy.
There is a lot of protection in incorporating or LLC route though.
You will need to talk to someone who knows the implications of both states I would guess.
Bob
Check out LegalZoom.com Lots of info and cheap to set yourself up without a lawyer if you don't have complicated tax issues.
Secretary of State office in your state of residence will have lots of info on their website.
For me, sub-chapter-S corporation was the best option. Same ease of operation as sole proprietor but with corporate liability advantages. Income tax is easy too, since I pay myself a salary upon which Social Security tax is paid and the rest is taxed as "shareholder equity" on my personal taxes. My accountant handles federal and state filings and my corporate tax form (no money paid, just necessary to generate K1 for personal filing.
Incidentally, if you have children for whom you pay college tuition anyway, you can make them shareholders in your corporation. Then you can pay their shareholder equity into an account out of which tuition and books are paid; but since they earn little, that money is taxed at their lower rate instead of your rate. I saved $2600 in income taxes that way last year.
Good luck.
As many have already told you, check with a CPA in your State. As I understand it, both an LLC and a Inc. will protect your personal assests. The big difference is that with a Inc. the profits must be disbursed according to who holds the stock, while an LLC you can pay each partner whatever amount it wants. The big thing here is to protect your assest in case of a lawsuit (remember that extension cord you ran at the jobsite that you just knew no one would trip over........)
Get this book:
http://www.amazon.com/Small-Time-Operator-Bernard-Kamoroff/dp/0917510186
Apart from the goofy artwork it really is the best reference for your purpose.
I chose to be an LLC--simpler than incorporating, perhaps less exposure than Sole Prop. and taxes are easy.
I'm still depressed about the Packers... I'm from Southern WI.
Second the vote for Small Time Operator. I'd also recommend looking around Nolo Press (http://www.nolo.com) They have a number of things like this online and a lot of business / legal books. My library has a bunch of them so I always look there first.I've decided to stay a sole proprietor, at least for a while. Since I'm the one doing all the work, I'm going to be the one they come after anyway.I don't doubt that you should talk to an attorney and a CPA, but do your homework first so you understand what the options are and some idea of what your choices are. No sense spending $100+/hr time doing remedial education, or to get confused, forget something, and have to go back for more.
Edited 1/23/2008 10:08 pm ET by byhammerandhand
Thanks for the replys. How did you technically/legally define yourself as a LLC? Is this somthing that has to be done through the state or through an attorney??? Does it cost money? Also, I fully understand that I will need to obtain a contractors license and get insurance, however, I often see people advertise they are bonded... what is that?
upnorthframer
"If you think education is expensive, try ignorance!!!"
I started my business under diress (we'd sold a house and had capital gain to offset) late in Dec. and I'd bought a lot of tools, got licensed and whatnot late that year so needed to get on it--so I asked an atty to file the paperwork for me. I still pay him the 80$ a year it takes to file an annual report--which is all I seem to have to do to be an LLC here in Oregon.
In Oregon, I had to file an assumed business name--you've got to search to see that the name you want to do business under isn't taken. Then file 'articles of organization' which the atty appears to have had 'stock' paperwork for. The state determines these guidelines.
Look up wisconsin's governing body for businesses--Wisconsin Business Bureau or whatever they call it and there should be some info on starting a business to get you what you need.
Or just go to an atty tomorrow. Probably take you 300$ max to have them advise you and get you set up.
On licensing, Oregon has their COnstruction Contractor's Board, that governs construction in the state. They have all sorts of different services including license info for consumers hiring a contractor, legal info on how to file liens and whatnot, and enforcement. You've got to be licensed here, and show that you are, advertise with your ccb# and show that you're bonded and insured.
I'll second what Johnq7 said. Talk to a lawyer and CPA familiar with how both entities function in the states you will be working in. While it is a straightforward process to incorporate or set up an LLC, don't get cheap with developing a strategy to protect your assets and understanding your tax liabilities. The grand or two you spend now may help protect what you create for yourself in the future.
Bruce
YOU will still be liable for what YOU personally do along with the INC or LLC as your employer.
So depending on what kind of work that the business and what kind that you do there can still be a lot personal liability.
.
A-holes. Hey every group has to have one. And I have been elected to be the one. I should make that my tagline.
Is this business going to be pretty much just you, are are there going to be employees/investors/partners?
The main reasons to form a business entity (corp, LLC, or other) is to shield the owners/investors from certain personal liabilities, establish ownership and governance rules, and to take advantage of how tax laws will affect the business.
You don't necessarily NEED an attorney or an accountant to set up a business entity. You will need to register the entity with some state, possibly more than one. (You say you live in one state, but will work in another -- this might mean setting up a corp in the home - or some other - state and registering as a foreign business in the non-home state(s) where you do work.) The state(s) will charge fairly minimal fees for this registration. That said, you may or may not want/need the guidance of an attorney and accountant to make the proper choices in setting your business up. (IME, attorneys often don't have a detailed grasp on the tax issues, and accountants often don't have a good grasp on the legal differences between the various types of entities.) You could do some research and make these choices on your own, but there are a lot of things to consider, so you'll have some homework to do!
Once an entity is set up, you can't just forget about it. You will need to take steps to maintain it's viability -- annual meetings (even if it's only meeting with yourself), minutes, regular filings, tax returns, seperate books, etc.
Mike Hennessy
Pittsburgh, PA
My plan is to have just myself in the business. I'll run and operate it and be the sole employee. Pretty basic I thought. I would like to keep it as simple as possible, however, I understand that I need to protect myself legally just incase and I want to be legal with all of my taxes.
upnorthframer
"If you think education is expensive, try ignorance!!!"
An INC or LLC will give you very, very, limited personal "protection".Maybe if UNF rents a piece of equipment and it is stolen the they amount that they can recover might be limited to the assests of the business.But lets say that UNF, inc has a job remodeling a house.And UNF, Inc hires an employee UNF.Now the EMPLOYEE UNF uses some oily rages in finishing and leaves them in the house and causing a fire, killing their 5 YO child.Sure UNF, Inc is going to be used and with $5,000 in assests you are "protected".But they will also go after the employee that caused the fire, UNF..
.
A-holes. Hey every group has to have one. And I have been elected to be the one. I should make that my tagline.
"just incase and I want to be legal with all of my taxes."
Just in case???? LOL!
If it's just you, you may not need an entity -- just a sole proprietership.
Mike HennessyPittsburgh, PA
Being the sole employee you're owner, CEO, and peon of any form of business you create so, yes, protections are there but limited since you are the actions of the entire business. Becuse you're the CEO you're repsonsible for what heappens, and beacause you did the work you are repsonsible for what happens. You wear every hat in the business.
Check with your CPA to figure the tax advantages (ie minimizations), check with your Atty to learn the legal exposures. Trying to go without these 2 departments of your Company isn't the wisest in business. You're a good carpenter, are you good at taxes? At business law? Bring the CPA & Atty on to your team and you'll be money ahead.
As others have said, it varies state to state but in general;
1) You can remain just yourself as a sole propriator
2) An LLC gives you some protection (SOME) by protecting your personal assets, It is treated the same as a sole propriator as far as taxes go, so many see an advantage there, myself included. In Michigan it is very inexpensive and easy to set one up yourself.
3) An Inc. is its own entity in the eyes of the law, & for taxation purposes. If the Inc. shows a profit, taxes will be due on that profit & it is taxable AGAIN when you pay yourself out of the Inc.
This is very general, and there are lots of exceptions, in my area, most contractors are LLC, only the very large ones form Corporations
FWIW, a corp and LLC would generally be treated about the same, tax-wise, in the OP's scenario. If he was set up as a corp, he'd probably elect "S Corp" status for tax filing, so either way, pretty much all the income would flow through to his personal tax return without being taxed twice.
Mike HennessyPittsburgh, PA