
Ask HN: Question about forming a company for side projects. - jrussbowman
What I'm thinking about doing is forming a LLC to run some of my side projects under. I'd like to look into seeing if I can make money both with advertising and selling services with at least one of my projects.<p>I'm self funding right now, and working by myself. I'd rather do a simple LLC with a simple operating agreement and then if one my projects turns into something I'd want get investors for, or investors want to invest in, I'd form a new company and transfer the assets to it.<p>The LLC would be to protect personal liability, I'd even be looking into what the costs are for liability insurance. However, drafting up corporate documents and forming a class c in preparation for what the future may hold is something I'm not comfortable doing right now as I've never done it, and I don't think I can afford a lawyer right now to do it.<p>Is that a logical plan, or is there something I'm not thinking about that I should be?
======
lionhearted
At this point, I've twice - not once but _twice_ formed corporate entities for
projects that never got off the ground. I won't do that again unless I'm
diving into a high liability field, or have ridiculously high assets that it's
worth it from an EV perspective... your chance of getting sued selling basic
advertising and contracting services are pretty low, and if you're contracting
individually they'd sue you as an individual anyways even if they're not
supposed to. This might protect your assets some if you lose, but you'd still
be on the hook for legal fees to defend enough to protect yourself from
personal liability.

My take - just get started. Form up an LLC once you get your first cash coming
in. Ignore this if you have significantly high assets already. If not, this is
probably being over-cautious, and the time and money is probably better spent
elsewhere.

Edit: It's pretty trivial to assign intellectual property you own to a
corporate you own too, if you ever want investors. If an investor wants you,
not having an entity already won't slow you down. If anything, the wrong kind
of entity is probably more of a hassle to transfer IP from and dissolve. Just
get started.

~~~
arn
But if you had formed a single entity for all your side projects, then it
wouldn't have happened a second time (you wouldn't have to have formed 2
entities for projects that never got off the ground -- just one).

I think it's reasonable to start a single llc for your side projects, and to
spin them off as needed. And is what I have done (and spun off 2 LLCs from the
original).

The problem if you don't is that everything will get muddled in your personal
finances and that's not a good thing. (I have no idea about the logistics if
you want funding down the line, however)

~~~
enjo
By definition everything in a LLC is muddled in with your personal finances.
That's why it's a "pass-thru entity". For tax purposes, they really are one
and the same.

~~~
JangoSteve
This is not true. A pass-through entity simply means that the LLC does not
_pay_ taxes. It does however keep separate records and submits separate tax
forms than you do personally.

It goes like this:

    
    
      LLC files form 1065
        Form 1065 includes income / expenses of the LLC
        Attached to form 1065 is a form K1 for each member
          Form K1 includes the (net profit/loss * member's % ownership) + guaranteed payments (like a salary)
    
      You file form 1040
        Attached to form 1040 is your copy of the K1, which gets treated as additional income
        You may also attach your personal business expenses [1]
        You pay taxes on this ammount
    

Your LLC then mails in the 1065 + K1s. Then you send in your 1040 + K1s + the
taxes you owe personally.

So you see, LLCs file tax forms completely separately, it's only the check you
have to write to the government that's "pass-through".

[1] Your personal business expenses are expenses that came out of your
personal account for a business expense, so like a reimbursable expense. This
gets reported on your personal taxes rather than the company's separate
business expenses that came out of the company account. In general, just try
not to do this if you can help it, as it just makes things more confusing.

~~~
GrowWebs
Correct me if I am wrong, but a 1065 might be overkill for a one owner
business (LLC or not). Yes you should report your LLC income separately on a
1065 & allocate profit/loss if there are multiple owners. However, if there is
only one owner, it is IMO an extra unneeded step.

For a small business with one owner, a Schedule C (or C-EZ) attached to the
1040 will suffice. No need to send a 1065 to the IRS and then submit a K1; it
is just a small business in the eyes of the IRS.

Keep it simple by keeping track/records of your business income and expenses
and report it on the Sched C which attaches to your 1040.

Note: I am currently taking a corporate tax course & studying for the CPA
exam. I prepared taxes as a VITA volunteer last year.

~~~
JangoSteve
Yes, good catch, sorry I didn't clarify. So essentially, the 1065 + K1 has 2
main purposes as I understand it. 1) Report the business income / expenses,
and 2) report the respective percentages that each member takes of the
business's profit / loss (notice there is no (3) for the LLC actually paying
taxes, this was my main point).

With a single-person LLC, it's even simpler, because there is no (2). This is
why single-person LLCs can file a Schedule C as a simple attachment to their
own taxes, which gets reported on personal taxes as other income, just like
the K1 would. And Schedule C is still reporting all of the company's income /
expenses separately than the individual's other financials, so there is still
no "muddying up" between business and personal finances.

------
albahk
I am doing the same, but in Hong Kong its called a Limited Liability (Ltd)
company.

My main reason is for subscribers that have recurring subscriptions through
Paypal and where there is no way to transfer payments from "Joe Citizen" to
"Joe's Company Ltd" if it takes off in the future.

Also, if you want to apply for a merchant account then you must be a Ltd
company. Its about US$1000 to get a basic LTD company registered in HK.

------
Encosia
I've been using an LLC for my ad-supported websites' income, paid writing, and
side consulting work for a few years.

I'm _far_ from a financial expert, so I could be wrong, but my impression is
that it's been very beneficial in the finance department. You can purchase an
awful lot of things with effectively pre-tax dollars if they are legitimate
business expenses (like that new MBP); things that you may have normally
purchased with post-tax funds anyway.

I haven't needed to invoke its liability protections, but I've been told (by
counsel) that the most important thing is to keep your money well separated.
If you intermingle your funds or use business funds for personal expenses,
that can be used to pierce the corporate veil and nullify your protection.

~~~
ahoyhere
I've been told that the rules are more flexible for LLC deductions than they
are for sole proprieters (freelancers), especially when it comes to writing
off parts of a home or equipment that is not 100% business use.

The advice I was given was: for a sole proprieter, you have to prove that a
thing is used exclusively for a business; for a corporation, you have to prove
only that a thing cannot be used exclusively for non-business reasons.

------
JangoSteve
I setup an LLC for my side projects and consulting a couple years ago. Since
then, it has evolved into my consultancy that I now do full-time (in fact, my
latest creation, LeadNuke, is a "product of Alfa Jango, LLC", and may be spun
off if I decide to take any investment for it).

Forming an LLC really is not very difficult, and it's good practice to get
started early if you plan on going full-time at some point. More importantly,
the clarity boundaries it provides to your business expenses and taxes is
worth the effort alone.

Single-person LLCs are legit and can protect your personal liability IF you
run it like a legit company. People who form single-person LLCs have a
tendency to get lazy with record-keeping and procedures. Don't fall into this
trap. If someone sues you, and the judge looks over your records and says,
"Yeah, but you didn't do anything differently than if you hadn't formed an
LLC," personal liability protection is gone. This means, setup a separate
business bank account for ALL business income/expenses, sign ALL contracts
with your business name, make sure clients address checks and issue your 1099s
to your business name, etc.

Concerning insurance, I wouldn't bother unless you're working on a project
that has the potential to lose a lot of money if you do something wrong. If
you work on an ecommerce application for a company that will be doing $50k or
more sales a month through it, perhaps insurance starts looking like a good
idea (god forbid you accidentally leave their merchant account in test mode
when you deploy, and no one catches it for a week).

If you do get insurance, what you actually want is called Errors and Omissions
insurance (liability insurance is for if you have a physical office and you
want to protect against your equipment if there's a fire, or if a client
visits and slips and breaks their arm). If you get E&O insurance, be sure to
shop around, many of the big insurance companies won't do it for you, because
of how new and unknown the web-based software industry is, so you might have
to go with a smaller local insurance company to work out some policy that fits
your needs.

EDIT: I should clarify that in Michigan, forming an LLC is incredibly easy.
I'm not sure about California, if that's where you are.

------
rodh
I have been recommending to self-employed people here in the UK to set up a
limited company if they can, as taxes on dividends in this country are much
lower than those on pay.

If you reduce your salary to a small (but not unreasonable) amount and
withdraw extra money form the company in dividends, is a legal and perfectly
reasonable way of saving on your taxes. However I do not know if this strategy
would provide any benefit in the US tax system. I guess it depends on the
state you live in.

------
jrussbowman
Thanks for all the replies. I think the consensus is that I'm on track. It's
actually cheaper to register an LLC in Deleware than it is in my home state of
VA, so I'll look at that.

I am aware that I will have to keep all the paperwork, hold an annual meeting
(even if it is with myself) and everything else to make sure it's established
as an entity.

Besides personal liability, finances are another issue. The main thing I want
to do though is when I sign up for services like ad.ly, bing advertising and
even Google adsense, all the money goes into an account other than my personal
one. That way I can also track how much money I'm really bringing in. Using it
for personal consulting would be very helpful as well. This also means I can
transfer my domains to that entity as well. The separation of finances is
something that I think will be very helpful. I'm currently on a 3 year plan I
created to get rid of a lot of my own debt, so separating business finances
will be helpful. Also, at this stage I'd like to make sure everything the
projects make go back into project so that hopefully one of them does turn out
to be a profitable venture.

------
dotBen
Unless you have some big assets that makes you personally worth suing or,
frankly, you are doing something slightly dodgy that you want some separation
from, then I would only form the company once you are making a few $1000
profit.

When you create the LLC you will have filing costs, anual LLC costs ($800/year
for a CA LLC), accountants fees... You basically don't want to be paying those
until you have income to offset them.

You mentioned forming a company to do several side project with the view that
if one takes off it will be already set up for investment and growth... well
don't forget that all of your other side projects will be in there too and so
investors will own those ideas too. You might decide that if a given
business/side project is worth having an entity then it's probably worth
having its own entity in its own right.

------
Osiris
As far as taxes are concerned, I understand that a single-person LLC is really
no different than a sole proprietorship. The income from the LLC is passed
through on your taxes (LLC isn't recognized by the IRS) and taxed the same as
extra income plus self-employment tax.

After doing research, I decided against forming an LLC for my side-business
(software) since it's just me and I don't expect to have any liability issues.

It's much more important to form a legal entity when you have a partner that
you need to split profits with. In this case, I'm leaning toward S-Corp as it
allows a lot more flexibility than LLC and doesn't require that you pay self-
employment tax on disbursements as long as you take a reasonable salary.

------
devmonk
From what I've been told, only plan on creating an LLC if you:

1\. Want to be able to write a bunch of stuff off as company expense.

2\. Don't mind the paperwork.

For liability you need insurance, not protection from an LLC or C-Corp,
neither of which will necessarily protect your assets if you are working on
your own.

The advantage of a C-Corp primarily is to get business from companies
interested in corp-to-corp. If you look on Dice, etc. there are a number of
jobs listed as corp-to-corp only. I read that this partially stems from a
court decision where contractor employees were able to sue for benefits that
weren't even W2, but that if you are under a C-Corp they wouldn't have to
worry about that.

~~~
BTBurke
You can't write anything off unless you have income from that company coming
in to offset against.

------
tocomment
Let me know what you find out about the insurance. I've been curious about
that.

------
Konreu
I would recommend spending some time reading "Inc. and Grow Rich!"
(<http://www.amazon.com/gp/product/B001OXCERE/>). This book will help you
decide whether incorporating is right in your situation; and, if it is, what
type of corporation best fits your goals for the future. Incorporating has
more benefits than just liability; see if any of these benefits are of
interest to you.

------
iworkforthem
I would suggest you do it the other way round; create more side projects,
monetize them, form LLC. Not sure why you need to protect liability for your
side projects.

------
grandalf
Be sure you check into the minimum tax... CA has about an $800 minimum tax on
S-Corps and may have one for LLCs too.

~~~
rgrieselhuber
It holds for LLCs too.

------
roblund
One thing I would note, if you plan to open a business checking account most
banks will want to see the tax id number for your business.

------
klbarry
Advantage to making an LLC: Interns of all sorts will work for you for free,
even just doing your taxes for you, since you can give them a credible spot on
their resume. My friend who went to Y-Combinator has an intern right now for
that reason, it's great.

~~~
rpavlick
This is very likely to be illegal.

[http://www.mndaily.com/2010/04/22/unpaid-internships-
under-i...](http://www.mndaily.com/2010/04/22/unpaid-internships-under-
investigation)

