LLC or Sole Proprietorship for simple MVP
I'm definitely being too paranoid about this, but I've been working on a consulting side gig, and have started to get some offers for my work. I'm in the awkward stage where I'm making a tiny bit of money, but not nearly enough to justify filing for an LLC. (I'm in MA where filing is $500 per year plus potentially more if I hire a lawyer to check everything over) I was wondering if and when y'all decided to take the leap to file for the LLC for your side gig.
My experience: don't do what I did.
I have had a few LLCs and C-corps. Playing house is a great distraction, getting a name, a domain, a DBA, the corp documents, then a business card.
I paid:
I frequently consult. I have yet to find a company that would pay me as an LLC. It changes the nature of the relationship.
I cannot find the podcast I heard years ago that was an interview with a startup lawyer. The long and short is if you are going to raise venture funding or have co-founders and IP worth anything, then incorporate. If you are a solopreneur, incorporate when it makes sense from a tax perspective.
My two cents.
Creating an LLC for your business will protect you personally from any losses your business may generate - but if it's a 'side hustle' type of thing that might not be an issue. You also have some good tax benefits as well. I've used lawyers to create, and I've also done it on my own. My thought is if you're generating some income that's greater than the fees needed to file / keep current ... an LLC isn't a bad way to go.
Business liability insurance is really the only thing that can protect you. I've used The Hartford in the past. It's very affordable as well.
Josh from Baremetrics wrote a great article about the necessary insurances: https://baremetrics.com/blog/startup-insurance (if you don't have any employees then you won't need all of them)
@twalling how much did you pay with Hartford? I currently have some revenue but don't know if it already justifies loosing big part of it to insurance.
Looks like I paid about $500 for the year. It all depends on your coverage too. I was contracting through an agency and they had requirements for coverage.
So just assuming it would be roughly the same for you, you're looking at the same cost as the LLC BUT you'd be getting much more protection plus you get to pay it monthly/quarterly, etc vs one large payment.
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The biggest is that you avoid double taxation. Basically, C-corps are taxed based on income, then you'd be taxed again personally based on your own income. LLC treat all business income at personal so you're only taxed once.
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Yo! I'm doing both in a way, sole proprietorship for my small projects (big help tax-wise with little overhead) and an LLC co-owned with some friends for more formal / larger projects.
We've found this space can be incredibly confusing, people tell you "just do X" as if it's simple, but then once you start digging into it you probably find that they don't quite know how to do it either. Especially if your situation isn't cookie-cutter. Though if they have demonstrated experience / track record, ask good questions & take notes!
Seems to be hit & miss on finding a good resource for tax / detailed business formation questions as well.
How does the sole proprietorship help you with tax burdens? The LLC is the easiest way to protect yourself and the taxes are still done through yourself (separately, though you take income from the business). The LLC is the go-to. It can house nearly everything you're doing (John's Ventures) and easily turn into a C-corp if your side project gets bigger.
The sole proprietorship helps with tax burdens by allowing you to deduct expenses; you fill out a Schedule C and can reduce your tax liability by all or some of your loss on the business. This results in a reduction of your taxable income.
Definitely agreed on the LLC being advisable in general, though as Momotaro said, he's not making enough to warrant an LLC at this time. It's something to aim at, but many indie hacker ventures probably start in this 'awkward stage' of not knowing if the concept is going anywhere, but incurring some expenses to find out.
In some states an LLC is cheap; in CA the LLC franchise fees are $800/yr! A sole proprietorship can be a good way to get off the ground and test a concept / give some runway for things to solidify. I've met a lot of people who started an LLC early, shut down the venture within a few months, and paid $500-$1000 (filing fees+franchise tax+dissolution fees) for a corporate structure that they didn't need.
Goes without saying that I'm not a tax/business structure professional; have just struggled with this one before (and like I said, very difficult to find someone that can answer ALL of your questions about the intricacies of these structures. If you can, please reach out! :)
This is all super helpful information, thanks so much everyone!
Just curiose but why shut down the company if it can still be used for another project? I have been running with a C-corp for my first startup which is completely bootstrapped and have no revenue as of now so dont have to report any tax.
If you're a serial venture-starter, probably makes sense to keep the company going in anticipation of the next one. If it wasn't for annual fees it'd be an easy answer; ultimately people have to weigh the costs and benefits and do what they need to do
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It really depends on what state you're in; it's $50 to file an LLC and $10/yr in Colorado but $70 to file and ~$800/yr in California.
Sole proprietorship costs vary as well but are generally very low (may need some sort of business license etc, depends on location)
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If you say you're "paranoid" due to the risk of getting sued, etc then the LLC won't really help you as much as you think. Simply get liability insurance.
The only reason I've seen it valuable to get an LLC for contract work was when I was working with companies that required it. One contract even required me to have insurance and that's when I learned more about how that's really where you'll be getting protection.
It's very easy to "pierce the corporate veil" legally speaking... https://www.nolo.com/legal-encyclopedia/personal-liability-piercing-corporate-veil-33006.html
I also did this in MA and yes it sucks how they price it.
That makes a lot of sense. When you're paying contractors or employees, did you need to hire a lawyer to figure out tax breakdowns?
I did have a former co-worker do some work as well via this contract I had and no, I didn't need a lawyer. I simply paid him and my accountant at the end of the year made a 1099-MISC for him. The biggest help when you're doing this is to use an accountant to do your taxes at the end of the year. Single member LLC or not, it's still going to be pass-through taxation and while it's not that complicated its super helpful having someone else do it.
That makes a ton of sense, thanks so much!
I'll also add that at the time, I simply used The Hartford. It was easy and affordable. https://www.thehartford.com/general-liability-insurance
Coming from a background of having a main business I operate under, I just work on side projects under that. I don't know that I'd bother otherwise. If I spent $500 in accounting costs for every thing I've dreamt up and started working on, I'd be in a hole!
Hi @momotaro, I decided to file for a LLC just before I put out the MVP for my startup Green Design Guru (www.greendesignguru.com) so I was recently in the exact position you currently are in. I was only going to build an email list, but was still advised by the entrepreneur law assistance clinic in my university to file for a LLC before I collected any user data (so they were way more paranoid about it than you are!)
Going into the specifics: I filed in PA (where I was based at the time) and it cost a total of $125 to electronically file a Certificate of Organization and a Docketing Statement (the blank templates of which were available at the PA Department of State website). I also had to generate a Tax ID number from the website. A couple of days later, I got an approval email for the State department with my entity number, so I was good to go.
I then created an Operating Agreement and the Contribution Agreement from a couple of templates and that was it. Hope this helps. If you need any of these templates, just let me know.
Once you're big enough that an LLC makes sense, I'd consider opening it under a state that actively competes to be an appealing place to do so, such as Wyoming. You'll pay much less and have more privacy.
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Can you clarify a bit? I have created a Wyoming LLC before. I didn't have to pay any fees to any other state and the cost and administration has been minimal.
What Colin said. Again, not a lawyer, but if you have "nexus" in a state, you're typically required to register as a foreign corporation/LLC which requires typically an annual fee plus state income tax prep. Speak with a lawyer about it, but most of the benefits of a wyoming/nevada corp/LLC tend not to accrue unless you're resident in those states or unless you're trying to justify shifting a percentage of your profits to that state, but as a small business, that's non-trivial to justify at audit time. Now of course, you may not have been caught by your home state if you previously only had a wyoming LLC, but that's like not paying your taxes - it may be OK - until it catches up with you.
I'm not a US resident.
No lawyer here so hopefully Jared follows up but I know that some states (ex: IL) require you to register as a foreign LLC if you register in another state than the one where your business is located (yes even if it’s an online business).
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generally, no, you shouldn't.
i had the same question a few months ago. since then, my approach and my business model have changed so often.
i don't know where you come from, but it is usually possible to have a business as an individual.
generally it depends on two things:
a) the liability. if you do something where there can be damage, then maybe a limited liability company is necessary. but with most software projects, i don't think so.
b) whether you do it alone or with co-founders. with co-founders, i don't think you can get around it if you really want to keep it waterproof.
(i'm not a lawyer and I am from germany, so that's not legal advice)
Hey Klaus, can you elaborate on your point with co-founders? I have one co-founder so I'd like to make sure everything is water-tight and fair from his perspective.
If you have a co-founder, then maybe it makes sense to have a company as the owner of your shared intelectual property.
but like everything else here, it depends on what kind of IP we are talking here about..
Hey there! A bit off topic but where in MA are you located? Also, in your shoes I would go without filing for incorporation until you have enough revenue to pay for it without feeling the belt tighten much. That money would be better spent on gaining more clients, in turn making more money
Hey Alonso, I'm in Boston! If you're also in the area, would love to meet up :)
You also want to look at your line of work. Would there be any 'decent' potential of being sued? If so, go LLC so they can't just go straight after your personal assets like they could with sp.
Would you say that in your experience, technical/marketing consulting has a high risk of getting sued?
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They could most certainly lawyer up. It's just in the definition of sp, you have no protection at all. The llc (limited liability) does provide some protection, unless you are negligent, etc (which of course is how they can get to you). @jared might certainly know more. I'm neither a lawyer, nor play one on tv.
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What's the foundation of a solution to this, starting a corporation?
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I have a co-founder, so I figured it would be best to incorporate!
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