Sunday I blogged that I was going to be meeting with an accountant and listed a few questions that I was going to ask him to dive deeper into the realms of setting up a business entity, such as an LLC or a C corp. The basis for the meeting was because with the amount of money that I had been bringing in recently from ebay and my website development business, there was some money that was not being reported as income and instead was just being deposited and not being accounted for. So there were some worries about the possibility of getting audited or having different problems with paying state taxes.
So, I wanted to learn more about my options, discuss my ventures, and see what may be the best idea for me as an entrepreneur. Now, before I go any further, I want to STRESS that this is advice that was given to ME and is specific to my case. That being said, it is always best to get your own advice from a certified professional such as an accountant or lawyer or both! So, with that, I am going to just talk about some of my different options, the answers to some of the questions that I asked, and what the future holds for how I do business.
We started off by just discussing the differences between setting up an LLC and a corporation such as an S corp or C corp. Besides the initial set up costs, another major difference was the tax filings that would have to be done. In my particular case and with my particular accountant, if I were to set up an S or C corp, the corporate tax filings would be an additional $600-$1200 on top of the standard $300 to file the normal state taxes. That’s a lot of money when I am only talking about generating say $10,000 over the next 7 months. However, I’ll save all the talk about the different types of entities for another day or for another blogger. Check out the SBA or SCORE for more related resources.
When figuring out if you are going to start a business and move from being a sole proprietorship to a more formal corporate structure, you need to determine how much money you think you would realistically make/earn. In my case, by the end of the year, by goal is to reach $10,000 through website development projects. That being said, in the scope of things, that is not really a lot. And IN MY CASE we decided that it would actually be better to stay a sole proprietorship for the time being rather than setting up a business such as an LLC in the middle of the year. So, come the first of the new year, I will be reevaluating and at the point, for sure, be registering a company to roll all my business assets, income, and expenses into. However, the nice thing that I liked about staying a sole proprietorship is that I can still obtain a DBA (doing business as) name. That way, I can do business as ProfessionalGFX and have clients make payments to ProfessionalGFX instead of me personally. This is nice to keep the income separate. Another nice thing with this set up is that it is very easy to move from one business structure to another. In my case, the progression will most likely be: sole proprietorship > LLC > C Corp.
Many of the questions I had for the accountant were focused on my business and the type of things that I am doing, including ebay and website development. So one thing we discussed was the legal protection that each structure offers and the suggestion was made to have a clause in my web development contracts that clearly states that any clients who decide to take legal action can only sue for up to the amount of the contract (say $1,000 or $2,000 as opposed to being able to sue and go after all my personal assets – car, money, etc.).
Another question I had was about different deductions that can be taken when operating the business. Even as a sole proprietorship, I will still be able to start taking different business deductions including travel, conference registrations, eduction (seminars, training, etc), meals, and entertainment. One major question I had was about deducting different meals or equipment if I were to write reviews on the restaurant or piece of camping equipment on one of my blogs such as Dorm Room Biz or TheGearHouse. The determination was made that if the meal is for entertaining purposes (such as a lunch or dinner meeting with a client) 50% of the total would be deductible because it falls under the category of meals and entertainment. However, the loop hole or catch to this is that if you were to provide a meal to your employees or contracts while working on a project (say you had to work late on something and worked through dinner time) you could deduct 100% of the total because it deals with the employees welfare. With purchasing different items and equipment for reviewing, it was my accountants belief that as long as the review that was written was publicly available (posted on a website) and was in depth and thorough then you should be able to deduct the full value of an item as a business expense. This is good news because that is something I am going to be looking to do in the near future 🙂
Isabella commented on my previous post:
I would add to that: as far as expansion thoughts go, is it better to add on new people as employees, or as 1099 independent contractors and b) does the answer change based on the business structure chosen.
These are also questions that I had and were answered for me as we discussed my future plans for my development business and how I thought it was going to expand. I mentioned that I would mostly be using contractors or outsourcing different work to others as opposed to hiring new employees. If you can get away with using independent contractors, this is a better option, because as long as you have a solid agreement/contract in place with that person, you can get away with out having to pay any health insurance, medical benefits, or workers compensation for that person. These are some of the biggest expenses that businesses face, so if you can avoid them, try to! You would just need to state in your contract with the independent contractor that you are in no way responsible for any insurance or benefits and you as the business are not liable for anything that may happen. This puts the responsibility on that contractor to find their own insurance, retirement accounts, etc, etc. Then, all you have to do is send them a 1099 for the amount of work that they performed and it becomes their responsibility to file that correctly. Also, that answer should not change based on the business structure you have set up. My suggestion is to avoid hiring employees for as long as you can to avoid all the added extra expenses. However, as you expand and grow your business, that may be hard to do and you will eventually need to bring on employees and incur those different expenses.
I think that pretty much sums up most of the meeting that I had. My accountant did pass along a business card of another local web development company that I am going to network with and see if there may be any possibilities for collaborations or outsourced work in the future! On top of that, he also gave me a copy of a version of Quick Books to start using to manage the income and expenses for my business.
So what’s the next step? I’ll be filing my DBA forms and then setting up a separate bank account to use for my income and expenses to keep everything a little better organized! After a few months, I’ll be able to evaluate where I am at and better gauge the need for a corporate entity.
Got any accounting related questions? We also discussed other deductions like home office space and similar items. Leave a comment and maybe I can pass along some more information that was brought up during my meeting!
Best of luck everyone! Now get out there and make some money!
All good advice.
I myself am a web designer, also do some ebay business, and have a few other income streams I’m trying to develop. Just like yourself, I plan to go the LLC taxes as an S-Corp route later this year. I just don’t have enough revenue to justify it currently.
Best of luck to you, and remember, just about any meal you eat if you discuss business then it is a tax deduction. Every time my wife and I eat out, we are talking about the business, and telling people about it, so almost always it’s a tax deduction… But yes, that is usually only 50%. Still, it adds up quick. Also, be sure to track your mileage as well.
Finally, I’m still trying to get you to email me regarding using some of your resources at my speaking presentations to college students about starting businesses while still in school.
If you would email me at eb at ellisbenus.com that would be greatly appreciate! Thanks!
Good stuff Chris. On my paranoid side, I would suggest not disclosing income, etc. and if it is reported or not. If you ever, God forbid, get audited that comment could haunt you. While we aren’t talk big money, you just never know.
– Mike “Mr. Paranoid” Michalowicz
It is always difficult to chart the precise moment at which a hobby venture begins to be a business and should be created as an LLC or company. The downside is that once you have bought the paperwork, paid your accountant and sorted the tax, you probably won’t have any money left at all, especially if you pay yourself a salary from the company!
The upside is that you now view your online business earnings as a serious business venture and therefore you will work all the harder to maintain your income figures, assess your internet marketing strategies and start new programs. You will soon want to go full time!
The most useful networking to be done is to set up joint ventures with others who sell your line of product, and ezine/newletter owners who promote like items. Starting a company is a big step but it can be the one that rockets your online income into the serious numbers! Good Luck! xx
Nice write up, Chris, and thanks for answering my question. Huge favor, if you would: I totally entered in the wrong URL — as you can see, that link you have to my name leads one to some other website far, far away. Could you tweak it for me? 😉 My brain was somewhere else with the first comment.
I’m stumbling this – very valuable to entrepreneurs starting out 🙂
Isa Murphy
It you liked it, please digg it!