001:

choose a structure

Why make it official?

• The main reason individuals choose to incorporate as a business is to obtain legal and financial protection. If you are ever involved in a lawsuit (without being incorporated) your personal finances and assets may be at risk — including your home and savings.

• Presenting as an incorporated business substantiates and legitimizes your business to potential customers and other companies you may want to work with.

• Incorporated businesses have an easier time gaining access to funding through investors and small business loans.

• Once incorporated, you will have the ability to deduct expenses on your taxes — like equipment, supplies and business services you use.

get to know your options:

If you’re working on your own, without employees, you’re most likely going to be choosing between forming a Sole-Proprietorship and an LLC (Limited Liability Company).

In general terms, a Sole-Proprietorship is NOT a legal entity. It simply refers to an individual who owns a business and is personally responsible for its’ debts. An LLC is basically a combination of a corporation and a partnership.

*If you’re looking to raise capital, you can look into corporation structures. It is possible to transition an LLC to a corporation in most states, or to remain as an LLC and elect to be taxed as an S corporation.

*Use this information to help you make a decision, but you should consult with a Tax Attorney, Business Consultant, or Financial Planner to ensure you’re making the right choice for your unique situation.

comparing your options

There are a few key differences between a Sole-Proprietorship and an LLC

Sole-Proprietorship

• OWNERSHIP — one owner

• FILING FEE — Business Certificate in NYC $100 + Brooklyn $120

• LIABILITY — unlimited personal liability

• REGULATION — requires licenses/permits when applicable

Downsides:

• Personally liable for debt and lawsuits of the business

• Difficulty raising capital and receiving a loan or line of credit

choose if:

• You are looking to keep initial investment expenses low

• You plan to work on your own

• You’re not concerned about accruing debt or receiving a lawsuit

Further Details

Information that may help you make your decision.

Taxes:

With both the Sole-Proprietorship and LLC, you are required to pay quarterly estimated taxes if you expect to owe more than $1000 when you file your returns. You can use this IRS Form 1040-ES to calculate your estimated taxes each quarter. The payments for estimated taxes for 2019 were scheduled on April 15th, June 17th, September 16th, and January 15th, 2020 — these exact dates will vary based on the year, but can be found directly on the Form 1040-ES.

Banking:

When forming an LLC, you will be given the option to receive an EIN (Employee Identification Number) or Tax ID. These numbers are used when filing taxes and opening business banking and credit card accounts. If you choose to operate as a Sole-Proprietorship, you are often able to open a business banking or credit card account with DBA Certificate (Doing Business As), which can be filed with the state.

Retirement Accounts:

Since your employer will no longer be with-holding and/or contributing to your retirement plan, the responsibility will lie fully in your hands. At the bare minimum, you want to contribute the maximum to either a Traditional or Roth IRA per year. If you’re able to, contributing to a SEP IRA will significantly improve your chances of staying on track for retirement. I recommend checking out where you currently stand and where you can make improvements through using a retirement calculator.

Under both a Sole-Proprietorship and LLC, you are able to contribute to a Traditional or Roth IRA. The contribution is capped at $6000 per year, but keep in mind that you can roll the 401k from your previous job into an IRA.

For a Traditional IRA, contributions are tax deductible at both the state and federal levels. For a Roth IRA there is no tax deduction, but you withdraw the funds in retirement tax-free. There are income limits for Roth IRAs, if you’re coming in above $137,000 of AGI (Adjusted Gross Income) as a single-filer or above $203,000 of AGI as part of a married couple filing jointly, you will not qualify to contribute to a Roth IRA

A SEP (Simplified Employee Pension) IRA allows for a contribution of up to $56,000 per year (less if your business’ profit minus the dedication for 1/2 of your self-employment tax is less than $56,000).

Getting paid:

As a Sole-Proprietor or single member in an LLC, you are essentially just taking profits out of the business to pay yourself. We’ll get into strategies for this in Section 3: Getting Your Money In Order.

Things get a bit more complicated if you have a multi-member LLC — deciding whether to be taxed as a partnership or a corporation will dictate how each member is paid. If you’re being treated as a partnership, members will receive a draw from the profits and will be subject to pay quarterly federal estimated tax payments. If the LLC is being taxed as a corporation, the members can be paid a salary as they will be considered employees. The LLC will be responsible for withholding taxes. The remaining business profits will be distributed as dividends to shareholders.

Hiring Employees:

Both a Sole-Proprietorship and LLC are able to hire either employees or independent contractors — the main difference being in tax withholding responsibility. For an employee, the business must deduct income taxes from the employee wages, but independent contractors are responsible for paying their own income taxes.

Dissolving the business:

To dissolve an LLC, you must submit forms to the state with a $60 filing fee (in New York State). In order to dissolve a Sole-Proprietorship, you must inform the IRS and state tax authorities. Since a Sole-Proprietor did not form a legal entity and has the right to terminate their business at any time for any reason, no forms must be filed with the state.

Next: 002 Legally establishing your business