Why should(n't) I officially start a business?

March 28, 2006 3:24 PM

What are the advantages, disadvantages, and Important Things To Know about officially starting a business?

I am doing a thing on the web right now. I have made a very, very small amount of money off of it, but I'm seeing the possibility of making more.

I know nothing about the mechanics of officially establishing a business. Incorporating may be the word I'm looking for—taking Cortex Doing Some Stuff and turning it into Cortex Productions, Inc..

I'm in the United States. I'm a one-man operation working out of my kitchen in my spare time. Check the profile if you need to see the site for context.

I have minimal costs, but I am spending a little money—web hosting, musical equipment and software, (tiny, experimental) advertising expenses.

I have minimal revenue (very modest Adsense revenue from modest daily traffic) but hope to improve that—through merch sales; site donations; I'm talking to someone about licensing music from the site, too.

So should I jump through hoops and create, say, Cortex Productions Inc? Why should I? Why not? When should I? Are there distinct tax benefits to be had at this point? Deductions for business expenses, capital, etc? Incentive to have any income going to a business rather than my personal checking account?

Enlighten me!

posted by cortex to work & money (17 answers total)

Welcome aboard, cortex! I've had my own business for five years now. Like you, I'm a sole proprietor, so my business income shows up on my plain old 1040 (Schedule C). Why? It's simple (and my business has little chance of incurring liability).

My take: A lot of people get carried away with the "starting" of the business, filing forms, writing business plans, holding meetings, writing business plans, etc. Maybe it's more fun than actually doing the work?

Anyway, my suggestion: Just do it. Start operating your business as if all that stuff was done. See if your biz is viable. See if you even like it. (Not everyone is cut out for self-employment.)

Keep track of your income and expenses, and plan on paying your taxes. (Business owners get to take advantage of a lot of deductions.) ;-) But don't waste a lot of time and energy on the "starting." In a few months of running your business full-blast, you'll know whether you want to continue. If you do, then you can form a corporation, or whatever you're pondering now.

One thing you might need, esp. if you need to buy supplies: a business checking account. And in some places that means running a DBA (Doing Business As) notice in the local paper. But don't let that stuff slow you down.
posted by wordwhiz at 3:44 PM on March 28, 2006

Why do you want to incorporate? Just pay taxes for the profit on your personal tax if it's a sole proprietorship(you are the only owner)
posted by thebbxx at 3:49 PM on March 28, 2006

The short version is, if you don't plan to hire employees and aren't worried about shielding yourself from liability, there's absolutely no reason to incorporate. It makes doing your taxes exponentially more difficult, involves small but nontrivial expenses both up front and every year, and requires a lot of paperwork.

I have a one-man corporation (S-corp); I don't see any particular tax difference compared to when I was just a work-at-home contractor (though admittedly I don't spend a lot of time trying to find tax loopholes, so it's possible I'm not taking full advantage of it.)

That said, if you do want to do it, there are basically two ways to go: S-corp or LLC. LLC is somewhat simpler, S-corp is more flexible; I'm not going to bother going into more detail than that because if you go down either road you will need a lawyer to handle it for you, and s/he'll be better at explaining the advantages and disadvantages of each than I would.
posted by ook at 3:51 PM on March 28, 2006

Instead of jumping into declaring yourself a corporation, why not meet with a good accountant and have them go over basic record keeping and possible deductions and things like that? Get a filing system set up so you aren't blindsided at tax time. Keeping track of that stuff throughout the year gives you a good idea of how the business is doing and you will be prepared when you have to do taxes. I started with one file bin and about 25 folders and just shoved receipts into the appropriate folders throughout the year. It made things a lot easier and it wasn't hard to keep that kind of system organized.

There is also an organization called Score made up of retired business professionals. You might be able to have one of them give you some one on one advice and offer suggestions. I also took a very good class at a community college on starting a small business. It was cheap and covered the basics. Good luck!
posted by 45moore45 at 4:32 PM on March 28, 2006

I second wordwhiz's suggestion to just start doing it and see if it's worth pursuing further. Beyond that, a couple of comments on the "official" aspects of starting a business.

First of all, you'll be concerned mainly with two bodies of law: tax and corporate. Operating a business in various ways has various consequences for each area.

As to tax law, there are a few things you should be aware of. First, you will (probably) have to pay the self-employment tax on any earnings from your business, and it's a lot; depending on how much you make, your income tax including the S-E tax will probably be about 40% of that income. The good news is you get to take a lot of expenses pre-tax, as long as they're related to your business (in your case, think computers, musical stuff, office supplies, internet and telephone service...).

As to corporate law, the main thing to concern yourself with is limited liability. This is what protects your personal assets from tort lawsuits (unlikely) and business creditors (probably more likely) in case you run into either of those 2 problems. It may not be worth going through formal S- or C-Corp incorporation, but the info I'm finding on Google suggests that Oregon offers LLC protection to people in your situation, and so that may be the way to go. Very briefly, setting up an LLC basically enables you to get the liability protection without jumping through as many hoops as proper incorporation requires (there are also tax benefits but from your perspective, the tax ramifications of an LLC would basically be "same as it ever was"). Here's a list of the ways an LLC differs from other types of corporation; hopefully that's more enlightening than confusing.

Here's an Oregon-specific page; looks like you need publication #151. From this I see that organizing an LLC costs $55; I can't tell from this form whether they accept single-member LLCS in Oregon or not. They do in some other states. Maybe talk to an accountant and/or lawyer about this before you borrow any money for business purposes (including getting a company credit card, btw).
posted by rkent at 5:10 PM on March 28, 2006

Take a look at the applicable IRS forms - schedule C, where you state your profit and loss. It's easier if you know what it looks like before you set up your bookkeeping. Establish a separate account, and keep reasonably good records. Stuff like mileage, internet service, conferences, courses, and any expenses of operating the business are generally deductible. A good accountant is invaluable. I think the IRS will only allow you to show a loss for a certain number of years; good question for an accounting expert.

There are lots of books for small businesses; your library will have a good selection. There may be a branch of SCORE that can offer some free consulting. You don't need the trappings - logo, stationery, etc. You can print up some business cards on pre-perfed stock if you really want them. In your case, mini-cds might be fun. People often spend a lot of money on that stuff, which is fine if you have oodles of cash, but I think it can easily become a distraction. Focus on your product and growing your business.

Your site is fun, and treating it as a serious business may allow you to deduct some expenses. Check to make sure the business name is available before you use it. You don't need to incorporate to call yourself Cortex Worldwide Productions, as long as there is no other business by that name.
posted by theora55 at 5:14 PM on March 28, 2006

Me and a mate from work created a company when I was much younger. We were going to develop software for the Apple II and the TI 99/4A. We thought it would be good to set up the company to insulate ourselves from liability and get tax breaks on purchases of business-related stuff.

It was one of the stupidest moves I ever made. Cost a heap of time and money for absolutely no benefit.

Don't even think about becoming anything other than a sole trader until you're actually having the kinds of problems your accountant tells you incorporation will solve. Even then, get advice from multiple reputable professional sources before jumping through the first hoop.
posted by flabdablet at 5:15 PM on March 28, 2006

Related Q, opposite problem: my wife and I may need to start a business soon. We've incorporated before, S-Corp style, but I'm wondering if it's possible to incorporate now and keep the biz in our back pocket (tax-free) until we decide to move on the opportunity. Basically, if we decide to go for it, we'll need to be quickly incorporated so we can hit the ground running. Es possible to open the biz in limbo fashion for a while?
posted by diastematic at 5:34 PM on March 28, 2006

Cut your expected revenues in half.

Double your projected expenses.

Be honest about yourself, about whether you are capable of embracing the risk and responsibilities.
posted by I Love Tacos at 5:42 PM on March 28, 2006

I think the IRS will only allow you to show a loss for a certain number of years;

Not exactly; expenses are only deductible if the activity engaged in is for-profit, and if it generates gross income in excess of those deductions for 3 of 5 years, it is presumed to be for profit. I.R.C. § 183(d). If you can't meet this profit level, you can still argue it on the facts. Unless there's some other provision in the Code that insists you show profits within X years; at 6000-ish pages that's not exactly impossible.

diastematic: what the F are you talking about? In any year when you realize income, you must pay tax on that income, it doesn't matter what your incorporation status is. If you're talking about incorporating and not operating for X years, then I don't see what the tax consequences would be in the first place (since you won't be making any money... right?).
posted by rkent at 5:52 PM on March 28, 2006

diastematic, yes, it's certainly possible to create a corporation and let it lie dormant until you need it; just don't let the business take any income or make any payments. You'll still have to do the tax paperwork, even though it has no income, and pay filing fees and so forth every year.
posted by ook at 6:04 PM on March 28, 2006

Thanks for everything so far (and, as applicable, everything further). This has given me just the sort of general reasoning on the subject I was hoping for.
posted by cortex at 6:06 PM on March 28, 2006

Unincorporated businesses run a risk of unlimited liability. Incorporated businesses have limited liability. As far as I understand it. I live in Canada. This may (not) be an issue for you.
posted by philfromhavelock at 7:11 PM on March 28, 2006

Unincorporated businesses run a risk of unlimited liability. Incorporated businesses have limited liability. As far as I understand it. I live in Canada. This may (not) be an issue for you.

You got it, but just to reemphasize my point above: it's not necessarily an all-or-nothing thing, most states have intermediate business forms like the LLC or similar, that are short of formal incorporation, specifically designed to make life easy for the small business yet still offer limited liability.
posted by rkent at 6:45 AM on March 29, 2006

incorporate. open an LLC...

keep your business and personal financial life seperate.
it's worth the few dollars....
posted by Izzmeister at 2:39 PM on March 29, 2006

About being in business for yourself:

the three most important things are sleep, sex and cashflow.

If you have two out of three you're doing ok.
posted by Brussels at 2:42 PM on March 29, 2006

I did not bother doing anything, here.
posted by cortex at 8:54 AM on June 28, 2006