

Ask HN: Sole Proprietorship vs Limited Company - efka

I&#x27;m working fulltime on my startup, which is a B2B SAAS web product.  It will store some business data - nothing important like sales&#x2F;competitor data, but stuff a company still wouldn&#x27;t like to have leaked out.<p>I have the option of either setting up the business as a sole proprietor or limited company.  I don&#x27;t imagine my revenue will go near 10k in my first year, so I won&#x27;t pay any tax either way, which makes sole proprietorship more attractive in terms of cost savings (no&#x2F;less time with accountant).  I am worried about any sort of legal responsibility I would have to bare though.<p>Question: which is better for a small one-man SAAS startup with low expectations on income?
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oaksagelew
You might want to check out a "one-member LLC". Some/most U.S. states should
have a provision for this type of corporate structure.

It's an LLC (limited liability corporation), so you get most of the benefits
of a corporate shell around you. LLCs are also taxed as partnerships, not
corporations, so the tax structure - and amount of tax paid - is simpler and
less is usually paid.

The twist on a "single-member" LLC is that if your LLC consists of only one
person - you - then you're taxed not as a partnership but as a Sole
Proprietor.

So you get the best of both worlds: You get a real, legitimate corporation,
with the attendant liability protections. And you're taxed as a sole
proprietor, meaning you just complete a Schedule C in your Form 1040 returns.

LLCs are also usually cheap to set up and manage. In Massachusetts (where I
have my LLC), it's an excise tax of $500 annually. Reporting and bookkeeping
requirements are minimal - not much more than for any sole proprietor. So it's
a really good way to go.

Keep in mind that once you add someone as a member of your LLC (a partner,
effectively), this advantage disappears, and you'll have to file a 1065
Partnership Return, and calculate the % distribution to the partners. So your
accounting bill will go up, for sure, at that point.

Also be very clear on exactly what "limited liability" really means. Read up
on what protections you get and don't get. Just because it says "LLC" in your
corporate name doesn't mean you can get away with anything and everything.
Some protections are excluded. One is obviously any kind of fiduciary
malfeasance. So, just be clear on what liabilities are limited by this
structure.

Else, do check out the tax implications where you live for a single-member
LLC; you might find an ideal solution here.

Good luck with the business!

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amac
I would recommend a limited company. I started a SAAS service
([http://usehuman.com](http://usehuman.com)) for fun but also to learn about
the economics/technical side of the business. Whilst I developed the product
as a hobby, once I began charging, I decided incorporating would be best.

If anything, incorporating it not just about better bookkeeping, it means you
are committed. Companies (or individuals for that matter) buying your software
need re-assurance that they can rely on you.

Incorporating also doesn't mean you are tied to one particular product, it
gives you a platform to launch several products if that's what works for you.

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efka
Thanks for the responses.

I think eventually moving to a limited company is the way to go, however I
spoke to an accountant earlier and based on my estimated turnover of 3-4K from
September to April, he recommended I start as a sole proprietor to keep costs
down. I think keeping costs down is going to have to be a priority, since i'm
building from nothing. I'm based in the UK, so one-member LLC's arn't an
option - it's "sole trader" or "Limited Company" with nothing in-between.

In terms of liability, I may take out some insurance just to cover myself in
case of lawsuits.

