You have an idea, a product or just want to consult. If your like me it’s something you do on the side in your spare time, or you could be doing it full time. But your ready to take the next step and form an identity for your business, your corporate identity. Or maybe your on the sidelines, not sure if you should take that next step, well here are some of the reasons why I formed my company.
Liability & Asset Protection
This was my biggest reason for forming my company. I kept asking myself what if I got sued or my software caused a an issue, they could take my car, house, etc. If your working out in the world this should be in your mind, it’s a sad reality but we live in a litigation world and lawsuits are filed at the drop of a hat.
Talking to an accountant made me realize that forming a company around my software or consulting business had a number of positive tax benefits that could make it worth it alone. Forming a company could complicate your taxes and if your doing your taxes yourself this could send you to a CPA at tax time. But trust me a good CPA is a life saver, don’t use a tax prep service like H&R Block, find a good CPA by asking others. Typical charges for Federal Tax prep for an Inc is about $250 to $500.
You may not be in your venture by yourself, you could have one or more people who you are working on your next great idea with. Forming the company and assigning shares or partner status is a wonderful way to ensure that everyone is protected and no one will “run off” with the idea. Talk with all the people your going in with and come up with an equitable structure, it may not be 50/50, maybe it’s more like 80/20, make sure everyone agrees.
Let’s face it, Enterprise Widgets, Inc. looks better on marketing, form headers, bills, email’s and websites then Ted’s Widgets Emporium. Forming a company creates your corporate identity that can be difference between someone buying your software or services and not.
So if you are going to form your company the next question is what type of company are you going to form. I stressed about this for weeks, maybe months before I filed my paperwork. Seeming I live in Nevada it was easy for me to file here, but you also needs to choose *where* to form your company. States like Nevada are very good on corporate taxes unlike States like California.
So what type of company, a Limited Liability Corporation (LLC) or an Incorporation (Inc)? If your completely unsure don’t be afraid to talk to someone, like a lawyer or a tax professional. Your not locked into your decision, and filing paperwork can change your status, but that takes time and money.
I choose to go with an Incorporation, because of the marketing value conveyed with an Inc. and also it was far easier to add more people to my company at a latter time, for example inventors. This may not be the best choice for you, and the easiest, by far is an LLC. Inc’s require a lot of paperwork, yearly shareholder and directors meetings (even if it’s just you), director and even shareholder resolutions to open a bank account of perform corporate activities, etc. With an LLC there is none of that mess, and it’s what I would recommend if your not planning to be huge or have investors soon, remember you can always change it latter.
If you choose to form an Inc, what you should also look at is electing S Corp status. A normal Inc is a C Corp, which means taxes are levied and filed under the company itself. With an S Corp taxes work much like an LLC where they transferred to each shareholder of the Inc. This isn’t the most beneficial tax status if your having outside investors, but if your a single person or a small group of people it’s best to elect this and change it to a C Corp at a latter time, a tax professional can explain and help you with that.
One you create your company (LLC or Inc) you should file with the IRS and get a EIN number for your company. This is like a Social Security Number for your company, and will be required to file your companies federal taxes.
Starting your own company is a wonderful experience, but it can also be time consuming and a lot of paperwork. Don’t let that distract you from what you do best, create/sell software or consult. Use your company as a platform to put you best foot forward and brave the business world. The little bit of expense and time you put into your company could save you far, or earn you, more in the future.