When starting a business that you don't expect will make much money, are you better off forming an LLC or an S corp?
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farmer (
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December 4th, 2016
For example, (and this is not actually what I’m doing, but I am doing something similar,) let’s say I am hand making my own teapots and selling them online . For now it is just me, but I know someone who makes her own ceramic bowls and vases, and we would like to work out a plan whereby I would sell some of her products along with my own. And perhaps in the future I will want to contract with other craftspersons.
I want to incorporate for basic liability protection. What if someone I am selling for tells me they are using food-safe glaze and I sell an item as being suitable for food, but it turns out my supplier lied and the customer gets hurt? Also incorporation will allow me to open a business bank account and will make me appear more professional as I try to grow my business.
I do not expect to make much money the first year. I have a full-time job and this is something I am doing (for now at least) in my spare time. I’ve read conflicting information on whether an S corp would require me to pay myself a salary. I don’t expect to realistically make more that one or two thousand dollars in profit the first year, and that’s before taxes and the filing fees for starting my corporation.
In fact, it’s been surprisingly difficult to find any information on starting a corporation on the scale that I will be starting out with.
Has anyone out there started a business on a small scale? I would appreciate any advice or information.
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8 Answers
I am not an expert, an attorney, or an accountant. This is just my observation from my little corner of the world under Illinois law. Your state laws maybe different.
But I know a lot of people who have small businesses, developing and owning real estate. And they all use LLCs. I have helped a few people with the paperwork to set up an LLC.
You create the LLC by filling out short forms and paying a fee, open a checking account for the LLC, and run all the business through that account.
Afterwards, the LLC pays an annual fee and files an annual report (a VERY simple form downloadable from the Secretary of State).
The LLC does not have to file income taxes as a separate entity. If you are the sole member of the LLC, you report its income & expenses on your personal tax return.
Again, just my small experience with a few acquaintances. But it gives you an idea of what is possible.
The idea of an LLC, being a Limited Liability Company is to be a legal chasm between the business and the owner(s). If the aforementioned issue came up, someone got hurt off a lie, if the owners did not want to go to trial, and or their insurance was not large enough to cover the damages, their personal assets cannot be attacked, even if some or all were multimillionaires. The only assets anyone can attack would be that of the business, and if the business had little, I don’t know if an attorney would even try to gain relief by way of a tort claim.
I am not a lawyer, this isn’t legal advice. I think the LLC is usually what’s suggested these days, but I also think it may vary by location and the nature of the business and it’s risks. I also know that there isn’t always an ironclad wall of liability between business and personal, especially when the company only has one employee (I believe the term is “piercing the corporate veil”). I think there may be steps you can take to limit your personal liability. It’s probably best to have a conversation with a genuine Lawyer at some point.
I’m not a lawyer either, blah blah.
I always understood that an LLC was to protect you from lawsuits and personal liability, but that the tax treatment of a LLC was not as good as an S.
And that an S was favorable tax-wise, but had nothing to do with liability.
Please don’t go to a website for tax or legal information, and please don’t form any business entity until you’ve worked with a qualified professional who knows your specific facts and circumstances. Above all, don’t file LLC documents simply because that’s what people seem to be doing these days, or because someone tells you that it’s what “everyone” does. There’s no such a thing as one-size-fits-all.
I’m a CPA with 30+ years of experience. I would never give blind advice to anyone online. But, I do make plenty of money cleaning-up the messes that people create for themselves.
My lawyer had me set up an S corp and I really question that advice. Just to make me doubt her more, I recently moved and I have to notify the state, obviously, that my corporation is moving, so the lawyer drew up paperwork for me to send the state, and to write them a check, and I just got a letter from the state that I need to do something else regarding the address change. I’m not sure if all that paperwork was unnecessary, or if I had todo it plus this other thing. All I can say is my lawyer definitely did not help me enough.
If my liability would be better protected as an LLC then I’m pretty pissed. I’m fairly sure you can be an LLC,but federally file taxes the same way as an S corp.
Accountants can help you with these questions too, but I just found out my accountant gave me wrong information about paying sales tax—lovely. She already had given me wrong info about IRA’s.
I can’t tell you how much I hate being right and the professional who should know the laws is wrong. I understand when it is a rarely used tax law, but things they deal with daily?
My advice is read up. Read the IRS.gov site and ask a few people to get a few opinions. Then close your eyes, hope for the best, and sign the paperwork.
I’ve also been given very bad advice by a so-called accountant and my LLC got into sales tax trouble. Find someone with several good referrals from long established businesses.
Also, find out about running it as a hobby first.
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