Which business entity to use?

[mojobone]

Todd, I have a lot of experience with corporations, as I have started a handful.

This is not legal advice, but it is friendly advice based on experience. I looked at your profile, but didnt find where you are located. If you are located in the US, all below will make sense. If you are located outside the US, well, sorry, you are on your own.... but still I think most countries have similar principles in their corporate laws.

I will tell you what I did, as I sent off my incorporation papers just this week for my music business. Filing fee was $150. After I get the paperwork back from the South Dakota Secretary of State, I will use that (and the EIN, which will be assigned to me, which is an identification number used when I file my taxes with the IRS) to set up separate bank accounts for the LLC. Think of an EIN number as the corporate equivalent of a Social Security number.

1) I didn't use a lawyer. Ive founded a number corporations and have had a lot of experience with ups and downs of having a corp. My businesses have been audited by the IRS, and my businesses have been sued multiple times (and I have sued other businesses multiple times as well)..its not personal, its business, and its a jungle out there.. lol. In my experience having a corporation is a very valuable shield to limit personal liability.

For example, if you do an LLC you will need an Articles of Incorporation in order to set up a bank account, etc. You can get boilerplate ones on the internet on legal sites for free or small fee. I used the same one used for the last LLC i set up, I just changed the name of the LLC at the top and the signatories at the bottom.. its all boilerplate stuff, for the most part.

2) which type company? in most states, there are a number of different entities (these entities are recognized by IRS, as when you file there boxes that you check for C corp, S corp, LLC and also LLP)
C corp, or common corp
S corp
LLC (Limited Liability Corp)
LLP (Limited Liability Partnership, usually used by service firms like law firms and accountant firms)

I have had versions of each of the top 3.

C corp is like most corps on the stock exchange. With a C corp yes there is double taxation, to an extent. Whereas the c corp pays taxes on profits, salaries are a deductable expense to the corp, so they are not double taxed per se. What is double taxed is DISTRIBUTIONS to the shareholders. The distributions (dividends if you will )are not tax deductable by the C corp, and come out of after tax revenues, so they already have been taxed for income, and dividends are taxable to the shareholder, hence the double tax. Also, losses stay in the corp, and cannot be offset against other income by the shareholders.

The other 3 types are radically different, in that there is no double taxation, all profit and loss flows directly to the shareholder(s). So as a shareholder you will get a k1 form form the LLC or Corp (which if it is your Corp or LLC, you or your accountant will make out the K1 on behalf of the LLC), detailing your share of the profits or losses that you have to report on your 941 tax return. The LLC/S corp/LLP files a tax return, but is not liable for any income taxes because all of that flows out of the entity directly to the shareholders. I used losses from my s corp and llc corps to offset other income on my 941. IRS never auditted me for that, only for other expenses (I was traveling to japan extensively as a biz expense and they thought it was too big vs my total corp revenue so they looked into it, but when I showed recpts and that they were reasonable biz expenses, they had to accept them.)

3) Having a separate entity that does business on your behalf is a HUGE deterrent against personal liability. (NOTE: this is regarding civil lawsuits. Having a corp will not protect you from criminal activities, but your friends Im sure are talking about getting sued by other entities, ie civil lawsuit. For example, copyright infringment is typically a CIVIL case, not a CRIMINAL case) If you run your LLC or corp with an arms length standard of business (this means you have separate bank accounts, you dont intermingle personal and biz funds, you file all your annual reports and other required paperwork with your state Secretary of State, etc), you have huge advantage. Yes, if someone wants to sue you for infringement, they can put both you personally and your corp as defendants on the lawsuit, but dont let that scare you. Its a tactic, and putting it on the original lawsuit and actually making it stick in court are two radically different things. Of course it will cost you big legal bucks to defend it regardless, but it is 100000000% worth having a corp entity to act as a shield for liability. The legal term for making a shareholder or individual liable for things that a corporation did is called "Piercing The Corporate Veil".. that means they will have to prove that in practice you were the same as the corp, the two entities are intermingled. If you do as described above, your corp is pretty much safe. Ask any corporate lawyer, and they will tell you that in general Piercing The Corporate Veil is VERY VERY hard to do, as the legal bar is very high. Our corporate laws in the US are very good, they work as designed. One very topical example is our de facto Republican presidential nominee and his Atlantic City casino activities. All 3 of his CORPORATIONS went bankrupt, but (as he as stated numerous times), he PERSONALLY made out like a bandit. ("I took a lot of money out of Atlantic City" is one of his quotes.). This is not intended as a commentary either way positive or negative on Mr Trump, just an illustration. No one was successful in Piercing the Corporate Veil on his casino corporations, even tho they had his name all over them. Corporations are INVALUABLE business tools. They work the same whether it is a Fortune 10 company traded on the DJ or they have one owner and one employee (who is the same person). It doesn't matter in the eyes of the law.

I suggest an LLC. The S corp usually requires an annual meeting and an Annual Report to be sent into the state office. The LLC (at least in South Dakota) once set up does not require annual meetings nor does it require annual reports (which also come with a filing fee each year)

There you go. Here are my opinions. Hope it is useful to you..
Tim

Great post, Tim! This jibes perfectly with what I learned from my accountant and my research. I'd humbly suggest an accountant be your first hire, because it's unlikely you'll be sued, until you have pockets, deep or otherwise. The last person to be sued for the content of their music was Ozzy Osbourne, and the judge threw the case out after Oz explained that he'd be pretty daft to induce all his fans to commit suicide, because fans are where he gets his money. If you also solicit financial/investment advice, make sure you get it from someone with fiduciary responsibility and not a salesman/broker; in some states, any idiot can hang out a shingle. Oh, and since the subject came up, here's something everyone should know about Mr. Trump: http://bit.ly/29Uy6Dh