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Old 04-08-2013, 07:36 PM   #1
mlager8
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Is incorporation or LLC necessary?

So I've always done freelance through an agent who I get a W2 form from or just on the side. Now it seems I might have a stream of work that could end up being a substantial amount throughout the year. What is the benefit of incorporating or making an LLC? Does it just protect your personal assets from the business if anything should go wrong or are there tax benefits as well?
Do I need to go through any of this or am I being cautious for no reason?

To clarify when I say a substantial amount of work I mean for me and maybe 1 other guy, nothing crazy where I need employees or anything like that.

I have literally no connection or experience with the legal side of things and just want to know what other people do.

Thanks
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Old 04-08-2013, 08:22 PM   #2
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Hey man,

It might vary state by state. I setup an LLC here in Indiana for some freelance work a while back. I don't think it had any tax benefits though, other than having to file quarterly rather than yearly. I currently hold the position of CEO, and naturally make millions of dollars. It just made it easier for the company I was doing the work for to hire me as a corporation, rather than an individual.

-AJ
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Old 04-08-2013, 09:48 PM   #3
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Other than the legal shield, there can be some significant tax write-offs you will get with a corporation.

If you decide to incorporate, youll have the choice between a C-Corp or a S-corp.

From my understanding, a C-corp is better if you plan to save most of the $$$ you dont pay yourself from the corp. A S corp is better if you plan on paying most of the income from the corp to your or your business partners personal salaries. Each has differing tax benefits.
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Old 04-08-2013, 10:21 PM   #4
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Quote:
Originally Posted by SanjayChand
Other than the legal shield, there can be some significant tax write-offs you will get with a corporation.


Well I wouldn't call it significant. If you buy some equipment for your business, like a new computer, you can write that off and get a slight tax discount. I think when I did my last taxes last, I saved maybe $100. You'll have to pay yourself though if you want to spend your money on personal stuff. I guess you can just try to write up all your expenses as business expenses, but you could get audited.

-AJ
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Old 04-08-2013, 10:46 PM   #5
mlager8
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hmm, so basically if its not a large amount of work the only thing it's really helping me with is paperwork being made a little easier on the clients side.

I dont expect I really need legal protection but who knows
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Old 04-08-2013, 10:51 PM   #6
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Quote:
Originally Posted by AJ1
Well I wouldn't call it significant. If you buy some equipment for your business, like a new computer, you can write that off and get a slight tax discount. I think when I did my last taxes last, I saved maybe $100. You'll have to pay yourself though if you want to spend your money on personal stuff. I guess you can just try to write up all your expenses as business expenses, but you could get audited.

-AJ

Depends if it is a C-corp or an S-corp. With a C, the tax savings are greater if you keep most of the income within the corporation as opposed to paying out the majority to personal salary (in-which case a S corp might be better but the tax savings are less).
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Old 04-08-2013, 10:56 PM   #7
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Quote:
Originally Posted by mlager8
hmm, so basically if its not a large amount of work the only thing it's really helping me with is paperwork being made a little easier on the clients side.

I dont expect I really need legal protection but who knows

Well I wouldn't read too much into my ramblings. I do think its different in each state. But I think the overall message is that its not a way to dodge taxes. Your not going to save large amounts of money by incorporating as an individual.
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Old 04-09-2013, 04:08 AM   #8
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For me forming an LLC has had a few benefits, but mostly they are there to CYA.

For one your personal assets are legally protected in case somebody wants to sue your company, all they can get is the value of your company they can't get your house or raid your bank account. This is probably a remote possibility, but when you make a deal with a producer who is also a Lawyer and has a temper when they don't get "Pixar Quality" they can literally kill you in legal fees if they want to (this almost happened to me, I walked away before a contract was signed and the other guy who got the contract was threatened with legal action but nothing ever came out of it.) Not likely to happen, but it may help.

Other benefits vary on location, some states need you to incorporate or something before you can get a business license (again, may not be necessary but you could be fined for operating a business without one). Forming a LLC or other corp can also make it easier/possible to get a bank account to take checks made out to your business name. For me a business account helps me keep track of my business assets and helps you look professional, again it helps legally separate your personal and business assets just in case.

Tax-wise forming my LLC meant that I can get my business license and pay state and fed taxes in a way that helps me save a little bit of money. When I went all legit I was kind of blown away by how much I had to set aside from each job to make sure I wouldn't owe at the end of the year. Getting a professional accountant to help with (at least) the first year of your corporation can be invaluable because they can teach you all this stuff about keeping track of all the money you spend on your business what you can write off and use as adjustments. They will let you know about quarterly federal and state taxes, local taxes like gross receipts, what you need to do to avoid paying fines or late fees. An accountant can also help you setup a portion of your home or apartment to be legally used as a workspace, deduct your Cinefex subscription, computer depreciation, that trip to Siggraph, and many other expenses. You can do all of this without a corp, but then many tax benefits are lost because of the way you fill out a 1040-schedule C form at the end of the year. The savings are not huge but they can be if you are careful, keep good records, and find a good accountant it could be the difference between owing nothing (ideal) or owing a lot (bad) or being audited (scary).

Based on my experience, I would do it again because it provided me with peace of mind that I won't get fined or have something creep up on me. I would not recommend forming a business with you and your friend unless you get legal help setting it up. I know people that operate just fine without an LLC, so I guess it is possible but if you are serious about making this a full time freelance venture it may be worth looking into, or maybe investigating what organizations exist in your area that may help you setup your corp and give you more specific advice.

I must warn you that all of this is no fun (at least not for me), I hate it. I hate keeping track of every little thing I do for my LLC, I hate paying estimated taxes throughout the year, I really hate Gross receipts tax (in NM I lose about 7% of nearly everything I make off the top). I know why I pay taxes but I don't like taking all that time to figure out how much I have to pay, or seeing it as clearly as it is on a spreadsheet. All that said I would happily pay more taxes if I didn't have to worry about paying for private insurance (this I hate way more than anything and I am generally a pretty relaxed person!).

So in summary, forming a corp opens a few doors to business accounts and tax options and can help you organize your life, but it also creates a pile of work when you start one and will force you to take time away from actual work and free-time so you can take care of your grown-up life of paying your taxes, fees and responsibilities. I hope this helps a little, I know it's long-winded and vague, but you caught me at tax time and I have been thinking of all of this lately.

Good luck!
 
Old 04-09-2013, 11:38 AM   #9
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wow that was extremely informative, thanks for the in depth write up. Right now things are very much up in the air so I'm going to ask my accountant about it and bide my time until I think things are more concrete, but this definitely helps me make a better informed decision. Thanks again
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Old 04-09-2013, 11:47 PM   #10
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I didn't see it mentioned here, but the other alternative is to become a Sole Proprietorship (Sole Prop). You don't have to pay extra taxes to do so. If you become an LLC, you'll have to pay an automatic around $800 in taxes annually. There's little need to become an LLC unless you can foresee some major reason someone might sue you. Particularly if you are freelancing from home, and don't have a business space where clients might have the chance of becoming injured, or unless you plan on committing some sort of gross business negligence, an LLC will just cost you an unnecessary amount of money.

But the best thing is to consult with an accountant.
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Old 04-09-2013, 11:47 PM   #11
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