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Throughout my career, I've done some development and consulting projects in addition to my full time job. I've always just reported the income on my personal income tax forms. Now that I am getting more serious and hope to scale up my outside work (think Micro ISV) to hopefully one day replace my day job, I am considering incorporating. I don't expect that I will have significant income or expenses for a while, but it seems like forming a corporation is a logical first step to get things going and to put things in place for my future ambitions.

My biggest concern is how much administrative and paperwork that I am creating for myself. I've heard that a business in the US needs to file quarterly tax returns, and that seems like a major hassle. Also, I'm sure there are other administrative things that corporations have to do throughout the year that might be a burden given that my time will be scarce and better spent on getting the software to market.

The main point of my question was whether it was worth it to set up the shell of the company in advance when I don't really know yet if it will be a viable business idea. I just want a feel for what the minimum requirements (time and costs) are to maintain a company that is effectively idle.

So my question is this:
After I set up a corporation, what types of things (minimum) am I going to have to do on a regular basis to maintain my legal status as a corporation and comply with any applicable laws?

Note: I'm not looking for internal things associated with running a business like book-keeping, invoicing, or marketing. I am asking about Government and legal compliance issues that every company (even a single person company with no revenues yet) will have to do regularly.

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Starting and running a business in the US is actually a lot less complicated than most people think. You mention incorporation, but a corporation (or even an S-Corp) isn't generally the best entity to start a business with . Most likely you are going to want to form an LLC instead this will provide you with liability protection while minimizing your paperwork and taxes.

  • The cost for maintaining an LLC is relatively cheap $50-$1000 a year depending on your state and you can file the paperwork to form it yourself or pay an attorney to do it for you. Generally I would avoid the snake oil salesman that pitch specific out of state LLCs (Nevada, Delaware etc..) unless you have a specific reason or intend on doing business in the state.

  • With the LLC or a Corporation you need to make sure you maintain separate finances. If you use the LLC funds to pay personal expenses you run the risk of loosing the liability protection afforded by the LLC (piercing the corporate veil).

  • With a single member LLC you can file as a pass through entity and your LLC income would pass through to your federal return and taxes aren't any more complicated than putting your business income on your personal return like you do now. If you have employees things get more complex and it is really easiest to use a payroll service to process state and federal tax with holding.

  • Once your business picks up you will want to file quarterly tax payments in order to avoid an under payment penalty. Generally, most taxpayers will avoid the under payment penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or if they paid at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller. Even if you get hit by the penalty it is only 10% of the amount of tax you didn't pay in time.

  • If you are selling a service such writing one off projects you should be able to avoid having to collect and remit sales tax, but this is going to be very state specific. If you are selling software you will have to deal with sales tax assuming your state has a sales tax.

  • One more thing to look at is some cities require a business license in order to operate a business within city limits so it would also be a good idea to check with your city to find out if you need a business license.

  • Thanks for the thorough answer. The main point of my question was whether it was worth it to set up the shell of the company in advance when I don't really know yet if it will be a viable business idea. I just wanted a feel for what the minimum requirements to maintain a company that is effectively idle were. – JohnFx Jan 20 '11 at 17:00
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Compliance issues vary from country to country and, in the US, state to state as well. There'll be a number of levels, though:

  • Statutary audits: registered limited liability companies may be required to undergo an annual statutary audit; this doesn't have to be as daunting or expensive as it seems and I (in the UK) pay an accountant a monthly fee and pass all my statements of income and expenditure past them so that at the end of the year it is really a very automated procedure - however, the accounting fees are an ongoing expense;
  • Company tax: You can think of quarterly, semi-annual or annual tax as a terrible inconvenience, but employees pay tax every month; having the option of paying tax over a longer period also gives you the opportunity to put against it those asymmetric business expenses (or even use your tax reserves as a form of savings);
  • Consumer taxes: This can be VAT or GST; I find these to be the most awful ones to administer; they're confusing, expensive and painful - the other hassles are fine but consumer taxes (often demanded on invoice rather than on receipt of payment) can cripple a business and leave you tearing your hair out;
  • Local taxes: Similarly frustrating and will depend entirely on how you operate; home-based businesses tend to suffer fewer (but may still have some) while retailers will discover taxes related to everything from their signage to the make-up of their garbage.

Bear in mind that it is not that these taxes and responsibilities don't apply to sole traders or unregistered businesses, it's just that being registered signals your existence and introduces the bureaucracy to you all at once.

Update: Your accountant should manage your company and consumer tax calculations and submissions on your behalf (and a good one will complete all the paperwork on time plus let you know well in advance what your liability is, as well as offer advice on reducing and restructuring these liabilities). You're probably on your own for local taxes unless your accountant deals with these and is local to even know what they are.

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