Business-starting for idiots

May 17, 2006 5:39 PM

I have several questions about starting a business.

For some time I have been considering starting a part-time side business as an outdoor educator/mountain guide. I have been considering forming a corporation to limit my personal liability if someone got hurt and sued me, and to allow deductions for guide training and certification (an expensive process).

However, I know very little about the legal and tax implications of forming a business. (I have read this and this.) Further information: the business would only involve me (for the forseeable future) and would not necessarily make money for years.

Some specific questions:

Is forming an LLC a good idea?

Can I deduct training/certification expenses even if I don't yet have any revenue? Is there any benefit to me "lending" the business money to get it started, so the corporation then officially owes me money?

Is there anything I should know about doing this in Colorado specifically?

What are good resources to learn more about all this?

posted by medusa to work & money (11 comments total)

IAAL and you'll need one to take care of this question.
posted by Ironmouth at 5:46 PM on May 17, 2006

I and a friend formed a company once before we actually had a successful business. The initial, ongoing and windup paperwork costs made it an expensive waste of time. I wouldn't do it again.

On the other hand, we were in software development and highly unlikely to cop a personal injury lawsuit.

On the other other hand, that's what insurance is for.

Talk to your lawyer and your accountant.
posted by flabdablet at 6:04 PM on May 17, 2006

You don't need a lawyer to decide whether to form a LLC, or even to form one. The process is neither difficult nor expensive, and should not be baffling or mysterious either.

Go get some books from Nolo Press about LLC's. They will explain everything and/or walk you through the process, depending on which book you pick. Your library will have them, or Nolo sells PDF's online. I'll bet that Nolo's Quick LLC: All You Need to Know About Limited Liability Companies will fulfill the promise that its name makes.
posted by jellicle at 6:54 PM on May 17, 2006

I looked at forming a hosting company a while back, and did some research, and ultimately met with a lawyer. (We ended up not forming the company at all.) But I would not do anything business-related at all these days without forming an LLC / corporation to limit my liability. It might cost hundreds, but it could save you millions.

You can file a company without meeting with a laywer. There are CDs you can pick up in Staples for $20 or so on how to do it. It does vary state-to-state, but it seems that most states make filing for LLC status very easy.

I'm also not an accountant (though I've had some accounting courses), but I believe you can take itemized deductions for all that stuff. In fact, this article suggests that you should form a company for your hobby, whether you run it as a business or not.

I think you can go 5 or 10 years without the IRS caring that your business doesn't make money, as long as there's an attempt.
posted by fogster at 7:23 PM on May 17, 2006

Forming an LLC is not difficult. I was able to put one together through my Secretary of State's website in under an hour. You may want to start there.
posted by Ostara at 7:33 PM on May 17, 2006

You don't need to form a company to take the deductions. The expenses just need to be for the generation of income, and a part-time side business definitely qualfies as such. Just document everything very well - costs as well as income from the business.

As for limiting the liability, forming an LLC may or may not help out. But it can't hurt, and you can do it yourself for basically just the instruction books (ie Nolo) and the filing fees. You don't really need a lawyer unless you are making capital contibutions to something or have a "partner" in the enterprise.
posted by MrZero at 9:29 PM on May 17, 2006

There are a ton of good full books available on this site. I'd get them quick because this is site will probably be down soon.
posted by BigBrownBear at 7:55 AM on May 18, 2006

Forming a company isn't the issue, IMO.

Growing a business is. Anyone can form a company. THere are pros/cons to various organizational forms, but the idea and the enterprise is the core of it.

Paul Hawken's book Growing A Business is a good read, practical and inspirational.

http://www.amazon.com/gp/product/0671671642/002-9909918-8192001?v=glance&n=283155

You will learn something in the process and the younger you start, the greater the chance that you'll eventually get it right.
posted by FauxScot at 4:32 PM on May 18, 2006

As for the liability issue the corporation does give you some liability protections that a sole prop does not. But every entrepreneur no matter what should have a personal liability umbrella insurance policy. Don't believe all you hear about relying on a corporation to protect you against liabilities. The corporate veil can be easily pierced.

In a former life I owned a company called Judgment Recovery. Its function was to collect judgments. It is a very simple matter to appear before a judge and tell the judge that the principals are about to abscond with the assets to thwart creditors. In moments the corporate veil has been pierced. Within hours we were towing away the car. As for lawsuits, it is a little tougher to pierce the corporate veil, but it is done everyday. If a customer slips and falls while entering your business. The attorneys will sue the corporation, you personally, the landlord, the manufacturer of the door, the carpet mill that made the carpet and anyone who lives in that zip code.

The judge usually dismisses everybody but the corporation and you personally. Judges are more and more willing to hold officers of closely held corporations personally liable (especially if you have personally guaranteed other corporate debts). If and when they win the lawsuit your liability insurance should kick in and pay the settlement.

For further reading try: Earn a living without a job
posted by garyfugere at 4:51 AM on May 19, 2006

medusa: I get quetions like this frequently, and I'll give you the same answer I give everyone else. If you are considering starting a business, your first two orders of business should be retaining a lawyer and a CPA/tax advisor. If you can't fit these into your budget your business is fatally underfunded.

Should you start an LLC? It depends on many factors. There are two reasons to do so: liability protection and tax benefits. I can't speak well to the latter, but in many states LLC's do offer a valuable level of legal protection above and beyond other business forms. In some states, they offer two-way protection. By that I mean the individual is protected from busienss creditos and the business is protected from individual creditors. (Let's say you get into a car crash, get sued beyond policy limits, and lose - can the plaintiffs seize your business? In some states, if it's an LLC, maybe not.)

If there's anyone else involved in your business but you - partners, employees, investors, etc. then run, don't walk, to your nearest legal and tax advisor.

disclaimer: I'm not your lawyer. I might not even be a lawyer. I might be a MetaFilter Auto-Answer bot. Govern yourself accordingly.
posted by mikewas at 8:25 AM on May 19, 2006

Thanks for the helpful advice, both from humans and from auto-answer bots.
posted by medusa at 1:15 PM on May 19, 2006