LLC vs Inc?

September 13, 2004 9:21 AM

I am thinking of forming my own company. Not just for tax purposes but to prevent myself from being sued for work that I have done for a client. I primarly do web programming but like all branch out and do some other work. I am just now starting to look into an LLC or Inc. Where does one start with this and does anyone have any experience setting one up? Also what are the benefits of an LLC vs an Inc?
posted by thebwit to work & money (13 comments total)

I went though Bizfilings. Pretty painless. You pay them money, they take care of it and send you a bunch of stuff.

Regarding LLC versus Corp (there is S-corp and C-corp. Main difference seems to be in how taxes are done. Some states don't have/recognize C-coprs). I don't remember the difference between LLC and Inc. At the time I did it though I got a book on local incorporation laws (for texas, where I live) and decided on C-corp. LLC is cheaper. I may have had a reason for settling on C-corp, sorry I can't be more specific, I just don't remember. It might be because it's a partnership.

FYI, be careful when you start .a company. It protects you from personal liability UNLESS you mess some things up. In general when doing anything for the company you need to act as an agent of the company, not as yourself. So, you sign documents as Rusty Brooks, President and not just Rusty Brooks. Anything for the company, buy from the company account or do formal expense reports, etc. Maintain a strict seperation of company money. Keep a reasonable amount of money (a couple thousand I think) in the company account. Not keeping money aside to cover small legal costs can be an indication you aren't serious about the company, etc. A book on the subject will have lots of stuff like this.

The book I got is available in most book stores. I got a 2 year old one from a half price books. Some places also sell incorporation packages, with all the paperwork in them already.
posted by RustyBrooks at 9:54 AM on September 13, 2004

Re: a client suing you for work, is this a matter of the contract not being fulfilled, or they assumed work-for-hire when no such agreement was in place?
posted by mimi at 10:02 AM on September 13, 2004

I highly recommend the books put out by nolo press (www.nolo.com) on starting your own company. Another great resource is your state's business affairs department website. For instance when I was setting up a C-corp in Virginia the state's website had great pointers on required steps and forms.
posted by dirtylittlemonkey at 10:12 AM on September 13, 2004

Related question: Am I required to incorporate in the state I'm doing business in? The fees vary drastically from state to state. Why should I spend $515 to start an LLC in Massachusetts when I can start it in Colorado for a dollar?
posted by jpoulos at 10:22 AM on September 13, 2004

Never mind.
posted by jpoulos at 10:31 AM on September 13, 2004

I own an S Corp. in Virginia, also a website development shop. I chose S Corp. to avoid the double taxation of a C Corp. With a C, the company pays income tax, and then you pay income tax, which means you get hit twice before the money ends up in your pocket.

If I were you, I'd talk to an independent insurance agent (that is to say, not State Farm or some such nonsense) about getting yourself some professional liability insurance. You may find that it's less expensive for you to get tech professional coverage from U.S. Liability or a similar carrier, and you end up with protection just the same. (Only the sort of protection that you can mention to bigger clients, who will be impressed by your $1MM in coverage.)
posted by waldo at 10:44 AM on September 13, 2004

If I'm not mistaken you need to incorporate in any state in which you need to do business. So... if all your business is in colorado...

There are a lot of reasons a client might sue you. Say something you write for them doesn't work right and exposes *them* to some kind of liability. Or you don't finish, don't finish on time, don't deliver what was agreed upon in the contract, etc. If you incorporate you can still get sued, it's just that you personally will have less of a chance of being held liable -- your company will instead. This could lead to you losing the company, blah blah, but at least you won't have a personal bankruptcy to deal with.
posted by RustyBrooks at 10:59 AM on September 13, 2004

LLC vs. S-Corp.

Speak to an accountant and a tax attorney for more specific advice. Both offer varying, but crucial, information regarding your next move.
posted by BlueTrain at 11:00 AM on September 13, 2004

Regarding C-corp vs. S-corp taxes: not quite. The C-corp gets taxed on income. If you pay out 100% of your revenue as salary to yourself, it's not income (i.e. the company made 0 profit). If you pay it to yourself as a *dividend* you may be doubly taxed on it. This is, anyway, my understanding of things.
posted by RustyBrooks at 11:01 AM on September 13, 2004

Just went from an LLC to a corporation myself, primarily for tax reasons, but also for the improved protection. (I'm in basically the same business you described). The surrounding fees (setup, processing, etc.) for a corporation are definitely higher, but in my case, the tax benefits should definitely outweigh those.

Having wrestled with this issue a number of different times, the basic rule of thumb (for me), is:

1) If you're basically a one-person/two-person kind of shop, where you do all the work hands-on and deal with all the paperwork, etc., then you're probably better off with an LLC. Cheaper to set up, cheaper and easier to deal with in terms of taxes, etc.

2) If you're looking at more revenue than you take home yourself (like you're charging a client for an entire project, and then paying out a substantial amount of fees to sub-contractors), or if you're looking at more than just a few people on the payroll, then you should definitely look at a corporation.

Not only can the tax benefits of a corporation be substantial, but in those circumstances, you're also potentially liable for the mistakes of a lot of other people. Not only do you have to worry about a client who's litigious for the sake of being litigious (which is why _any_ consultant should have some liability protection), but you could have a sub-contractor who just gets sick and can't deliver, or just folds, or just sucks. In theory, at least, a corporation should help make sure you don't lose your house because of circumstances beyond your control.

No matter what, you should definitely talk to a good tax accountant. They should be able to help you establish the revenue threshold at which the tax savings under a corporation would make it worth it.
posted by LairBob at 12:08 PM on September 13, 2004

S-corps are pretty much designed for this. LLCs are tougher to set up which means you're paying the attorney more.

The LLC vs. S-Corp. link above is pretty good.
posted by skallas at 1:13 PM on September 13, 2004

skallas, I've found that while an LLC can indeed be a bit more complicated to set up, so the upfront lawyer/accountant fees might higher, in NY at least, all the filing fees, etc. around corporations are much higher.

For example, creating a "d/b/a" for the LLC just took a visit to City Hall, and costs $10. I did three or four simple variations, just to cover someone writing a check wrong, etc. Creating any single "d/b/a" for the corporation version of my company requires filing with the NY Secretary of State in Albany, and the total fees ran well over $100 for just one. (Sure, I could have saved some of that money by doing all the paperwork myself, but it was a lot more to deal with than the LLC.)
posted by LairBob at 2:38 PM on September 13, 2004

You should hit the library and get a book or pamphlet specific to your state to get background information. Some good links have been posted here as well, but each state is different so get some local info. Your Secretary of State Office may have some information as well. With this knowledge you really need to talk to an attorney to find out which entity type suits your needs and how to properly shield your personal assets. If you will be making a significant amount of money you should also consult an accountant. Most attornies in private practice will set up a corporation for you, and give you the necessary operating information, for a reasonable preset fee. Good luck.
posted by caddis at 3:56 PM on September 13, 2004