
Ask HN: How do you handle the business structure and taxes of side projects? - misthop
For those of you with income generating side projects, have you incorporated? Do you pay quarterly taxes? Do you list it as other, unreported income on your returns?
======
joshuaheard
Lawyer and entrpreneur here. There are 2 main reasons to incorporate:
liability protection and ease of administration.

You don't say what your side project is, but you have to ask your self whether
you need liability protection, that is what are the chances someone is going
to sue you for damages. If you feel you need liability protection, then you
should form an entity. I recommend an LLC in most cases. It is a pass-through
entity for taxes which means you pay taxes on your individual return (though
it still must file a business tax return). Also buy insurance.

The other reason is ease of administration. A legal entity will have some form
of controlling document. In an LLC, it is the Operating Agreement. This spells
out the rights and duties of the principals in the business. It also allows
for common ownership of the business assets. As principals come and go, the
LLC continues on. Finally, if you get big and you bring on investors, they
will want to see a legal entity for their protection.

The drawbacks of forming an LLC are the time and effort of drafting and filing
all the proper incorporating documents, paying the filing fees (in California
$800 per year), and the extra tax forms.

This is a complicated topic and I have given a high level view. There are lots
of resources on the internet and in bookstores on this topic. Nolo.com would
be a good place to start.

~~~
no_protocol
> paying the filing fees (in California $800 per year)

Wow, that seems super high. So if I was running a side project in California I
might be stuck deciding between wasting 10% or more of my income on fees or
putting my personal assets at risk in a sole proprietorship?

Since you mention you are a lawyer, can you comment at all on the limits (if
any) of liability protection with an LLC. Is a single-person LLC going to be a
solid shield over my personal assets, or are there still possible risks?

Edit: It looks like the fees to maintain an LLC in my locality would be less
than 5% of the $800 fee mentioned for California. Does California just not
like small businesses?

~~~
will_brown
>can you comment at all on the limits (if any) of liability protection with an
LLC. Is a single-person LLC going to be a solid shield over my personal
assets, or are there still possible risks?

Think of liability as a 2 way street.

1\. Someone suing your LLC and trying to collect against you/your assets
personally. Generally this is the type of protection you will receive with an
LLC (single or multi member) barring any exceptions, such as piercing the
corporate veil in which case the plaintiff _might_ go thru your LLC protection
and reach your personal assets to collect.

2\. Suing you and trying to get to your LLC. This is the direction the single
member LLC _might_ not offer protections. Imagine a scenario where you are
personally sued and you don't have personal assets to cover the judgement. Say
if you owned 1 share of Apple, obviously they can't collect against Apple just
because you are an owner, and the same protection will _typically_ exist with
a multi-member LLC. However, in the case of a single member LLC in these types
of cases the courts will likely allow the plaintiff to collect against LLC
and/or even foreclose on your LLC company/assets if need be.

>Does California just not like small businesses?

CA likes revenue and as high as the fee is, small businesses will pay because
they don't have options (they could incorporate in CA as opposed to organizing
an LLC or moving states).

One possible _hack_ is create LLC #1 in another state, qualify it as a foreign
LLC to do business in California, and and the end of the year repeat the
process with LLC #2 and transfer all assets from LLC #1 to LLC #2. The only
reason someone might not recommend this route is because people prefer
continuity of a business, but that shouldn't really be an issue when the main
goal is liability protection from side projects.

Edit: dissolve and file final tax return

~~~
gamblor956
You have not advised "hack." You've just advised someone to commit borderline
tax fraud. Please note that tax practice is unique in that _advisors_ can go
to jail or be criminally sanctioned for advising tax evasive strategies.

Also, I don't think you realize that foreign LLCs are required to pay the
franchise fee in California in order to be licensed to do business (meaning,
having employees, facilities, or activities in CA). Thus, if you're in CA,
your suggestion really just amounts to paying franchise taxes (or their
equivalents) to _two_ states instead of just one, and then committing tax
fraud in _two_ states instead of none.

I strongly suggest you delete this post and your followup post, because it can
be used against you in a court of law.

~~~
will_brown
>Also, I don't think you realize that foreign LLCs are required to pay the
franchise fee in California in order to be licensed to do business (meaning,
having employees, facilities, or activities in CA).

No, LLC's file an LLC-5 form and pay the $70 filing fee. The business will not
be liable for the Franchise Tax if the entity is dissolved or cancelled before
the liability is encurred (Franchise Tax Due Date) if the LLC is dissocled
after the Tax is still owed.[1]

>Thus, if you're in CA, your suggestion really just amounts to paying
franchise taxes (or their equivalents) to two states instead of just one, and
then committing tax fraud in two states instead of none.

Not remotely, _most_ states don't even have franchise taxes not all even have
_annual_ report requirements.

>I strongly suggest you delete this post and your followup post, because it
can be used against you in a court of law.

I think you are reading a lot of facts into my post that aren't there and
ignoring the facts that are there, for starters I wasn't asked for advice and
I didn't give advice. As one lawyer to another, if you are going to suggest I
delete my comment due to liability going so far to expressly state criminal
liability, I ask you show me a single case where the California Franchise Tax
Board has gone after anyone for tax evasion for dissolving their LLC and
creating a new one, because I can show you plenty of instances where the CA
secretary of state disolves an LLC prior to 4/15 and then opens a new LLC with
similar name (sometime exact same) immediately thereafter.

[1]
[https://www.ftb.ca.gov/businesses/faq/ab2341faq.shtml](https://www.ftb.ca.gov/businesses/faq/ab2341faq.shtml)

Edit:

BTW the specific form for this type of action is Certificate of Cancellation
Short Form (LLC-4/8) and it negates the Franchise Tax when:

1) being filed within twelve (12) months from the date the Articles of
Organization were filed with the Secretary of State;

2) The domestic LLC has no debts or other liabilities (other than tax
liability);

3) The known assets of the domestic LLC remaining after payment of, or
adequately providing for, known debts and liabilities have been distributed to
the persons entitled thereto or no known assets have been acquired;

4) The final tax return or a final annual tax return has been or will be filed
with the Franchise Tax Board;

5) The domestic LLC has not conducted any business from the time of the filing
of the Articles of Organization;

6) A majority of the managers or members, or if there are no managers or
members, the person or a majority of the persons who signed the Articles of
Organization, voted to dissolve the domestic LLC; and

7) If the domestic LLC received payments for interests from investors, those
payments have been returned to those investors

To conclude I never advised anyone to do this, but acknowledged it is possible
and LLCs for side projects that don't justify an $800 minimum franchise tax
are a good example of when something like this _might_ be done.

------
patio11
Obligatory disclaimers: not a lawyer, not an accountant, am employed by Stripe
to write about these sorts of topics, writing here only in my personal
capacity, none of the following is advice but rather just a pointer for your
future Google searches and talks w/ qualified professionals:

I ran my businesses for the first ~6 years as unincorporated sole
proprietorships. The exact mechanisms of doing this are different based on
where you are (both at a national and local level). Japan and the US are
fairly similar: a sole proprietorship exists as soon as you say it does. (In
Japan, you should probably walk down to the local tax office and file a form
announcing your intention to file 青色申告 next year if you plan on making more
than $30k revenue. They'll know which form to file and you are capable of
doing it write if you can read Japanese.) Some US localities will want you to
file for an assumed name / "doing business as" (DBA) with your local county
clerk or have a city business license -- you can usually find out about that
with some quick Googling. I filed a one-page form with Lake County, IL saying
that I was doing business as Kalzumeus Software (several years before I had
that LLC) and then had to pay ~$50 or so to put an ad in the newspaper for a
few weeks saying "Heads up Kalzumeus Software is actually Patrick."

You pay taxes on the _profits_ of the business, not on the _revenue_ of the
business, which is a crucially important distinction that many HNers do not
know when they start and which many do not properly operationalize even if
they know it. I cannot underline this enough: no software entrepreneur I've
ever met had a good handle on this when starting. If you sell $10k of software
and think "Hmm my profits are maybe $9.5k -- the only expense was a
DigitalOcean server" I think your profits are ~$0 after you spend a few hours
with an accountant walking through credit card receipts. They're going to walk
you through things like e.g. depreciation, apportioning business and personal
use of your Internet/cell phone, conferences, business entertaining,
(potentially!) home office use [+], etc etc. (A thing your accountant will
probably tell you, in the US, is that if you want to decrease your tax burden
for 2016 buying a Macbook for the business

You should ordinarily be listing income from a side business as business
income, at least in the US and Japan, and not as any other type of income.
This is both a) correct and b) gives you the ability to deduct expenses, which
is not possible on all types of income reported on e.g. one's 1040 or 青色申告.

The US has you pay quarterly estimated taxes. There are safe harbors which are
likely to cover you in the first year of running your side project.
[https://www.irs.gov/publications/p17/ch04.html#en_US_2015_pu...](https://www.irs.gov/publications/p17/ch04.html#en_US_2015_publink100032385)
The calculation of these can occasionally be complicated; this is a great "ask
an accountant" question because this is their bread-and-butter and that
particularly calculation is something that most accountants would do for free,
on spec, as part of soliciting your business for next year. The penalties for
not paying estimated tax in a timely manner are very small -- many
entrepreneurs of my acquaintance treat timely tax payment as a small discount
to the "real" tax bill and elect to simplify their lives by paying taxes once
a year rather than by calculating quarterly.

The chief reason to put a side project in an LLC is to reduce the risk of
liability of the side project flowing to you. Most side projects have
vanishingly little liability. Ask me for a citation some other time, but even
software development freelancing is low-risk -- my insurance company
calculates than ~0.5% of freelancers/consultants get sued in any given year.
Downside: when they do get sued, win or lose, that averages $40k in costs. If
you're doing something where you have non-trivial liability or if the prospect
of $40k+ vanishing just makes you unable to sleep at night, incorporate and
get an general liability / E&O policy. (Costs $1k or so per year as a floor;
mine as a comparable is $3k and has the words "patient health information" and
"HIPAA" on it, which contribute expense and underwriting fun times.)

If you have additional questions about this sort of thing, I'm writing about
it this week (in my employed capacity) and would love to hear what you're
thinking about.

[+] Home offices are historically a contentious deduction in the US, but one
of the reasons you have an accountant is so that they tell you consequential
things about the difference between the regs as written and the regs as
customarily applied like "You don't have an office? Oh, in Japan, we just
deduct 40% of your rent then. Substantiation requirement? Ah you Americans are
such kidders. There's the law on the books which is $CALCULATION but the tax
agency basically feels like you don't screw them too much on being aggressive
and they won't screw you too much on bringing out a tape measure to your
kitchen.")

~~~
chromeextdev
Thanks. This is great advice. If I want to incorporate, do you think I should
hire an CPA to do that and the filing later? Also, is there a particular type
of CPAs I should search for (say, on Yelp), like "small IT business CPA", or
is this simple enough that any CPA should be able to cover?

I look forward to reading your article. Would be great if you leave a link
here when it's available.

~~~
patio11
If you want to speak to an accountant to sanity check your plans, literally
any CPA should be able to help you do it, particularly those advertising a
specialty in small businesses. I would caution you that this is far from the
hardest question you'll have for your CPA over the next N years and that many
people who are competent to tell you what an LLC is are not competent at
giving meaningful advice about e.g. what sales tax filings are required for a
SaaS business.

I would not recommend having an accountant _actually create_ your company for
you, simply from a cost perspective. Making an LLC is as easy as buying a book
on Amazon. You wouldn't hire your accountant to buy you a book on accounting
from Amazon, because he'd charge you $200 extra to do so -- you'd just get the
name of the book and then buy it yourself. Cookie-cutter solo-founder LLCs are
roughly as simple as books or sweaters.

I don't make a habit of putting my own work on HN, but I express modestly high
confidence that Atlas' guides on these and related subjects will end up here
at some point.

~~~
chromeextdev
Thanks a lot, Patrick. This is very helpful to me.

------
up_and_up
> 1\. Have you incorporated?

No I operate as a sole proprietor.

> 2\. Do you pay quarterly taxes?

Nope, I pay the penalty since my income and ability to shelter it vary from
year to year. The penalty is something like 3% on the total taxes you owe. Not
too bad given the flexibility holding your money provides. Maybe I can load up
a i401K that year or need to save for some big purchase which is more valuable
then just giving the IRS the money.

> 3\. Do you list it as other, unreported income on your returns?

I file a Schedule C

I do it all using TaxAct. Super easy and cheap. Helped me to understand taxes
as well.

~~~
no_protocol
Can you share "how many zeroes" are in the income level of your sole
proprietorship?

Also, would love to hear what accounting processes any small businesses like
this are using.

~~~
up_and_up
Its a 4 zeros business. Decent side income from freelancing. Monthly invoicing
using Freshbooks. End of year accounting using TaxAct.

If things got any bigger or I went at it fulltime I would prob setup an LLC.
But keeping taxes simple at this point is preferable since its just me. I have
owned plenty of LLC's previously.

------
jstanley
I run several side projects[1], with varying degrees of profitably.

I haven't incorporated any of them, I see that as an unnecessary hassle.

I'm in England, and (as far as I'm aware) quarterly taxes aren't a thing here.
Until this year the income was negligible enough not to bother paying taxes,
but this year I've been keeping track of finances with ledger[2] and I intend
to pay taxes as "self-employed" for the first time at the end of this tax
year.

And to make sure I'm going in the right direction (not going to run out of
money) I add up my net worth, split by category (bank account, peer-to-peer
lending, stocks and shares, Bitcoin) at the start of every month and keep
track of it in a big text file.

[1] currently focusing on SMS Privacy, read my Indie Hackers interview at
[https://www.indiehackers.com/businesses/sms-
privacy](https://www.indiehackers.com/businesses/sms-privacy)

[2] [http://www.ledger-cli.org/](http://www.ledger-cli.org/)

~~~
addedlovely
Quarterly tax returns are a thing if you pay VAT.

Technically you should of been declaring that self employed income regardless
of its total, it's not separate from your main income, in terms of tax
liability - I believe it's combined with your main income.

~~~
hellofunk
Many file VAT only once per year, depending on various factors. Quarterly is
not necessarily the default option.

------
simonebrunozzi
I have been using Stripe Atlas for about 6-7 months now, for a small side
project that I spend part of my weekends on.

I have to say that Atlas might be one of the easiest, and least expensive,
ways to deal with the incorporation and the rest.

~~~
aantix
Is it just for those who live outside the U.S.?

Trying to figure out the easiest, cheapest way to setup an L.L.C.

~~~
patio11
Atlas works for folks in the US as well, but we don't support LLCs yet. You
can register an LLC by yourself with the state of Nevada or Wyoming for a
trivial amount of money. There exist hundreds of companies which will assist
with form preparation (of which LegalZoom is probably best) but both states
now have a web app which produces an adequate cookie cutter LLC for software
professionals with very simple needs.

Nevada is more convenient and modestly more expensive IIRC; Wyoming is more
privacy-conscious. I own 2 Nevada LLCs; as a consequence of this, my address
is trivially available on the Internet. If that gives you pause, Wyoming a
good option.

------
mosburger
I incorporated w/ a basic LLC pass-through back when I started freelancing
just for the liability protection. I don't freelance (much) lately, but I've
kept the LLC going in the meantime and run my very small side projects as part
of that LLC. If you decide to do a side project w/ an LLC you might want to
read up on "piercing the corporate veil" and be sure to keep your project's
income and expenses separate from any personal stuff. I personally have a
completely separate bank account, again from my freelancing days, and keep the
two things separated paying myself w/ distributions occasionally. I'm no
lawyer or accountant so I don't know if this is "enough," but I figure it
can't hurt.

------
brentm
If you're in the US I would consider forming an LLC in your home state and use
that as a catch all entity for your projects. If any of the projects take off
you can spin that project off into a different entity type (if you want). LLCs
are mostly painless to create & file taxes for.

~~~
gst
Would there by any advantage of a Delaware-based LLC (vs. home-state based
LLC, e.g., in California) if it's just for liability protection?

~~~
conductr
I had this conversation with an attorney friend recently. Apparently most
states have similar corporate laws, the difference is that Delaware has a huge
history of legal precedent. If you found yourself in a legal battle, for any
reason, you could probably defend yourself in a more easy and predictable
manner in Delaware.

------
dicroce
Personally speaking, enough of my side projects never made a dime that I
decided a while back to wait until I made $1 before incorporation. This has
saved me quite a bit of hassle.

~~~
prawn
Agreed. I have an incorporated entity for my general business/freelancing, but
keep side-projects informal until they get any serious traction.

------
analog31
I make a small electronic gadget, non computer related.

I've got an LLC for basic liability protection.

PayPal is my business system. All sales come in through PP, and I use the PP
credit card for my purchases. All documents are electronic. At tax time, I
download the entire year's transactions into a spreadsheet, add things up, and
enter the totals into a Schedule C.

Rather than filing quarterly taxes, I've simply bumped up the amount of
withholding from my regular day job.

~~~
tedmiston
> Rather than filing quarterly taxes, I've simply bumped up the amount of
> withholding from my regular day job.

So you overpay on the ~25% self-employment tax and balance everything out when
you file your taxes?

~~~
analog31
Yes. My target is to put in enough so my refund / payment is as close to zero
as practical, without the risk of having to pay a penalty. I've been able to
nail it reasonably well, all things considered.

------
edoceo
Entrepreneur here, on my fourth company.

Lawyer and Accountant. Budget about $10k/yr

Start as LLC then move to C-Corp as it grows and takes investment money.
Accountant files quarterly federal and state taxes. My wages are taken out on
W2.

When smaller the project is an LLC. Accountant still files paper but under
$100k only annual. Just take the money out as distribution.

Tax implications from either route. Encourage you to find a trusted advisor on
those matters

~~~
floathub
Just to clarify one point; when a member of the LLC, you'll be taking
"guaranteed payments" or allocations rather than W2 income (and paying
quarterly estimated personal taxes out of that). You only do W2 income once
it's a C-Corp.

Not a lawyer or an accountant, so use salt with the paragraph above.

(edited to clarify that post above is correct, but possibly ambiguous)

~~~
intrasight
S-Corp also, since IRS will take a dim view of not paying payroll taxes. My
accountant said use a rule of thumb of having at least 70% of pay be as W2.

------
jayess
99% of the time there's no reason to incorporate in Delaware for your side
project. Just form an LLC in your state and it'll be considered a "disregarded
entity" on your tax return and you'll report the income/expenses on schedule C
of your 1040.

If you're making more than a few grand (net) then you might consider having
your LLC taxed as a corporation and enjoy the 15% tax treatment. If Trump gets
his way, corporate taxes might finally be reduced and you'll get even more
favorable tax treatment.

However, if your intent is to enjoy the income but you expect a narrow net
income or loss (lots of expenses can be attributed to your business), then
stick with a single-member, disregarded entity, LLC.

------
chrisgoman
You mentioned "projects" (plural) and the way I have it setup is pretty
similar to those recommending an LLC (or S-Corp) in CA.

While the annual cost of $800 minimum tax plus maybe another $500 in
administrative fees (accountants, legal, etc.) is real money spent, you can
make it back in tax deductions and potential liability. If you have a
structure in place (another entity that is not you personally), it is much
easier to deduct expenses (less red flags) IF you make an attempt to actually
generate income -- the government cannot stop you from being a bad business
person :)

If you are in a 50% tax bracket, this could easily be offset by $3000 in
expenses such as hosting fees, domain names, costco membership, cell phone,
even your car lease. If you are renting, you can possibly deduct some portion
(~20%) of your rent (do not do this if you own a house). Get a separate bank
account + debit card, a separate credit card (maybe a business one with
rewards) and pay everything using that entity. You will end up making "owner
contribution" from your personal bank account to your business account every
month.

The extra wrinkle if you have multiple projects is that you can further
separate your different projects into "DBA"s (Doing Business As) which costs
an extra $100/yr (County Clerk Recorder, Publish in Magazine, separate bank
account, credit card, domain name) 100% owned by your LLC (or S-Corp). If you
shut down a DBA, it will cost maybe another $50. You will need a DBA to open a
bank account under that name.

While this may look like overkill, this keeps everything clean and if your
side project does take off, you will have some history with the business.

On a day-to-day basis, what I usually end up doing is setting aside a day to
deal with all these entities. Most bills are on each "company" credit card and
I call all the credit card companies to align the closing date. For example,
all my credit cards close around the 22nd or 23rd of every month. On the 12th
of every month, I pull up each account and pay them all using one screen of
online billpay if you have all your business accounts tied together using your
SSN.

Note: I have other companies that are their own entity as they are generating
income & have other partners. The setup here is specifically just for my side
projects.

~~~
brazzledazzle
If I recall correctly there are strict limitations on counting your car, cell
phone and rent as business expenses and they require extensive amounts of
documentation. I don't know how much they enforce these days since everyone
and their brother is hustling a pyramid scheme business but I would research
it first. Getting audited without reliable mileage logs, phone records in your
favor and a measurable separation between your personal living space and your
work area (like a door) could result in being stuck with a tax bill for back
taxes.

~~~
chrisgoman
You are correct, there are very strict rules so you do need to make an attempt
at making money (the definition of a "business"). If you are actually making a
profit (thereby paying taxes for your business entity "the LLC"), then it
makes it much easier. Now that I think about it, I think I end up paying my
accountant/tax firm about $30k/year mostly for tax returns (I do most of the
accounting myself in Xero)

~~~
brazzledazzle
Wow, that's quite an accounting bill. If that's for a small-to-medium size
business do you mind if I ask why it's so much?

I've heard good things about Xero, are you happy with it?

------
atwebb
>have you incorporated?

My state LLC

>Do you pay quarterly taxes?

Absolutely, mail a check with the coupon based on income earned.

>Do you list it as other, unreported income on your returns?

Schedule C and income from business, you pay Self-Employment Tax, SEPs are
nice to push off the income to retirement and see a tax benefit if it's
supplementary.

I also carry worker's comp and liability insurance, pricey, annoying to setup
and deal with but worth it from my perspective.

~~~
no_protocol
> I also carry worker's comp and liability insurance

Would love to hear ballpark figures on this stuff. I know it can easily be
apples to oranges, but I don't even have a rough idea where it would be.

~~~
atwebb
Sure, worker's comp is around $400 a year, the tech liability is <$2k.
Honestly, the hardest part was the analysis paralysis of "Gee what do I do,
I'm sure it's weird and complicated". Just called a local place, they are the
agent and got me a policy, similar to healthcare prior to the exchanges or
having a State Farm rep.

~~~
sean_patel
Hi, do you have any recommendations for a 'tech liability insurance' company?
I was told by my accountant that I need 1 too, and since I am in CA, she
advised me the same thing in these threads, i.e. Don't waste 800$ in single
member LLC, just get Liability Insurance

------
kkoomi
If you start an iOS app under your own name, then decide to form an LLC after
validating your idea, do your reviews and rankings get reset?

~~~
rezashirazian
No, this is a rather common occurrence and the transition on the App Store is
surprisingly smooth.

------
walterbell
Has anyone outside the US looked into the tax implications of Stripe Atlas?
These articles urge caution:

[http://tech.eu/features/9060/stripe-atlas-european-
startups/](http://tech.eu/features/9060/stripe-atlas-european-startups/)

[https://flagtheory.com/stripe-atlas/](https://flagtheory.com/stripe-atlas/)

------
caspg
For those from EU, which country within EU is the best to incorporate? Estonia
with their online residency seems interesting.

------
jv22222
I recommend that you do not form a company until you have validated the
project. I wrote a blog about it that explains why:

[https://blog.nugget.one/2016/08/19/dont-form-a-
company/](https://blog.nugget.one/2016/08/19/dont-form-a-company/)

~~~
tedmiston
> However, in the event your project is not working, this gives you a great
> back-out clause. Simply refund everyone that you captured money from and
> close the Stripe account or use it for your next test project.

Seems like an interesting loophole, but don't you have time limits associated
with refunds?

~~~
jv22222
Nope, not that I have seen.

------
cdnsteve
Unless you need the liability protection or have very high income, the
overhead in Canada of having a corp is very costly. Hiring an accountant to
file corp taxes is usually over $1500 a year alone, then you need payroll,
etc. Then you're also paying double tax on that income with a corp. Corp
receives income and pays corp tax, pays employee (you) you pay income tax.

If you have a small side project with low risk then I recommend sole
proprietor for sure.

In any case, soon as you start generating income you need to track
income/expenses, register your business, register for HST and setup a separate
bank account. I think TD here charges $25/mo just for that privilege.

So yeah, sometimes a fun side project loses its excitement when your stuck
doing paperwork and start adding up the expenses, it's not worth it.

~~~
mmastrac
> paying double tax

That's absolutely not true. In Canada, payroll is deducted as an expense
against your corporation's earnings. The money left over in the corporation is
taxed at corporate rates, but those are quite low for small businesses.

Also, more expenses are deductible as a corporation which balance out the much
higher costs of accounting. And the corporation is one of the few ways of
legally splitting income with a spouse in Canada.

For the rest of your comment, I agree that it's not ideal for someone starting
out. I think that the bar for starting a personal corp is around $20k/year in
side income.

I'm not an accountant, but I have been dealing with corporate taxes with one
as a small business owner for ten years.

~~~
cdnsteve
Corporate earnings are taxed. Your income is also taxed. That's double tax in
my mind.

~~~
napoleond
_> Corporate earnings are taxed. Your income is also taxed. That's double tax
in my mind._

No, you are incorrect.

There are basically two ways to draw money from a corporation that you own in
Canada: through payroll, or through dividends.

If you draw it through payroll, _that money never sees any taxes through the
corporation_. The only tax burden in the payroll scenario is your personal
income tax (same as any other employment income).

If you draw it through dividends, the corporation will pay some tax and you
personally will also pay some. However, your personal tax on dividends is less
than your personal tax on employment income--the total tax burden is quite
similar to what you would pay in taxes if you drew it through payroll, but
there can advantages/disadvantages depending on corporate/personal
circumstances.

Source: Canadian business owner.

------
PaulHoule
I have not incorporated. It is expensive to incorporate in Delaware and to do
it anywhere else is a big paperwork headache. (You'll need a board of
directors, annual meetings, etc.) If you are making less than $20,000 a year
it is probably not worth it, if you are making a lot more it probably is.

As for taxes, the penalties are not particularly punitive if you screw up and
you have years to manage the situation before anything critical happens. In
particular, if you go one year without making quarterly tax payments you will
probably walk away with no penality.

~~~
jeffmould
First, IANAL and/or CPA. However, incorporating in DE is fairly
straightforward, and compared to other states is inexpensive. You can
incorporate for as little as $89 filing fee. Of course, if you are not located
in DE you will need a registered agent, so that is an extra $50 a year.

As for board of directors, annual meetings, etc... no matter where you
incorporate you will technically need these, even in DE. But it is nothing
complex. As a single founder and sole shareholder, you simply elect yourself
to the board and write up/record minutes. Max amount of time 30 minutes. You
will have to also pay an annual fee for your corporation which is based on
assets and total shares. Another simple filing. These requirements are fairly
standard across the board in any state. Delaware is probably one of the least
expensive out of all from what I understand.

You can also do an LLC which reduces the paperwork and also provides similar
protections, while helping with taxes. Annual filing fees can be a little
higher, but you can avoid double taxation.

It is best to discuss with an attorney/accountant on the proper structure
based on your tax requirements though as each is taxed differently.

Finally, advising that penalties are minor so don't worry about it, is
probably the worse advice you can give someone. As someone who missed a
quarterly tax payment on a corporation several years ago, I can tell you the
headache of getting the penalty reduced far outweighed the cost. While the
penalty was not much, it was still costly and ended up costing more in
legal/accounting fees to correct the matter.

~~~
benp84
Don't forget the DE annual report fee ($50) and the DE annual franchise tax
($175 - $180,000, depending on share count). Plus the registered agent ($50) I
pay $275/year.

[[https://www.delawareinc.com/delaware-franchise-
tax/](https://www.delawareinc.com/delaware-franchise-tax/)]

The bigger cost for me is the C-Corp tax returns, average cost $806/year, but
I suppose that applies to C-Corps everywhere.

[[https://www.irs.com/articles/tax-preparation-costs-and-
fees](https://www.irs.com/articles/tax-preparation-costs-and-fees)]

~~~
jeffmould
Yeah, the franchise tax is going to depend on assets and total shares. So
varies by company. You can reduce by only issuing something like 100 shares at
first if it is only you.

As for C-Corp, again IANAL or accountant, but I would never recommend a single
founder go the C-Corp route. You are better off going as an LLC or taking the
S-Corp election to take advantage of the tax benefits. Much simpler, and
significantly cheaper, to do your annual returns.

------
lcall
I'm finding that the book by Entrepreneur magazine called _Start Your Own
Business: the only startup book you'll ever need_ is very helpful (no
connection with me).

EDIT: specifically, in the index entry for "business structures" and the
chapter on taxes. I also bought a few "personal MBA" books, & on marketing
etc, but this seemed clearly the best one to start with; those others I think
I'll come back to, later.

------
moeamaya
If you're based in California, we wrote detailed steps when we incorporated
earlier this year: [https://dixonandmoe.com/writing/how-to-form-an-llc-in-
califo...](https://dixonandmoe.com/writing/how-to-form-an-llc-in-california/)

The $800/year is indeed painful but it's cost of doing business (and
maintaining continuity).

------
ohstopitu
As someone based outside the US (Canada), would it be advisable to incorporate
in Delaware?

If not, how would I go about the income from my side projects?

~~~
mmastrac
Unless you plan on stepping foot in the US to do a lot of physical work, or
plan on holding US real estate, use a Canadian corporation. I've been dealing
with world-wide customers for ~10 years and have never incorporated in the US.

You should speak to an accountant before making any decisions, however.

~~~
PerfectElement
I've been doing the same for a while. SaaS with most customers in the US, but
the corporation is in Canada. The only hassle is that 10% of credit card
charges fail because banks may block international transactions. So we have to
tell clients to call their banks, etc. Not perfect, but better than dealing
with cross-border taxes.

------
shakna
Not incorporated, I operate as a sole trader.

As I'm an Aussie, I register an ABN (being a sole trader is free) and ensure I
pay/charge GST. I'm only required to file taxes if the business is earning in
excess of $10,000 annually. So most projects that go nowhere don't put any
onnus on me to be hyper vigilant.

------
brownedge
Does anyone have experience with incorporating a UK Ltd for such a use case?

~~~
phillc73
Yes. Unless you intend to spend a lot on equipment upfront, don't register for
VAT. You don't have to unless the company's income hits a certain threshold (I
forget exactly how much now). Just be careful about any VAT you think you
might save (offsetting purchases against collections). The burden of quarterly
returns is a pain.

Also, while the UK is still in the EU, consider starting a Limited company in
another country with a different corporate tax structure. Perhaps somewhere
like Ireland, Latvia or Malta might suit your requirements better.

~~~
brownedge
> consider starting a Limited company in another country with a different
> corporate tax structure.

Thanks and could you elaborate on this please.

~~~
phillc73
The UK currently has a corporate tax rate of 20%. Ireland is a 12.5% on
trading income, Malta is 35% but reducable to 5% in some circumstances,
Lithuania is also 5% for small companies, Estonia is 0% on undistributed
profits.[1]

Some research for a decent advisor in one of the countries you might consider
and then ask them for advice. I found finding advice like this in the UK
either difficult to obtain from a regular accountant, or the advisors I found
were targetting the very wealthy. Ultimately I talked to three different
people in the countries above and went with one of them to setup the Limited
company for a small business.

[1]
[https://en.m.wikipedia.org/wiki/Tax_rates_in_Europe](https://en.m.wikipedia.org/wiki/Tax_rates_in_Europe)

~~~
wfn
Note re. LT, to form a Limited liability company in UK you don't need to have
any shareholder capital; you do need the latter for forming an Ltd in
Lithuania (" _UAB_ "). There are other corporation types available but if you
want limited liability in LT, you'll need to put in 2500 EUR.

~~~
phillc73
That's a good point. However, keep in mind other EU jurisdictions like Germany
and Austria require even more initial share capital, and also have generally
higher base corporation tax rates.

