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Ask HN: How do you handle the business structure and taxes of side projects?
260 points by misthop on Nov 14, 2016 | hide | past | web | favorite | 139 comments
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?



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.


> 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.

Bah. I briefly did a side project that did not end up making any money (it was more of a hobby with a partner), and that $800 a year was the biggest buzzkill. What a waste. By far our two biggest yearly expenses were 1. that $800 and 2. paying an accountant* a few hundred to do our 40 page tax return that said $0 at the bottom.

Noting that I am NOT a lawyer and my legal advice is worthless: I would not LLC again until whatever project I was working on actually was making money.

[*] Sure, I could have probably prepared the tax returns myself, but I was not willing to risk making a typo on page 34 and having the IRS after me for $N,000. No thanks.


I was in the same boat and I agree. It's actually one of the many examples of why it is difficult to start a business in California. Bootstrapping is hard enough, and on top of that you have to pay over $1,000 in taxes and related expenses.


I have a Delaware LLC, just for liability protection now. I know the US tax code is complex, but making this one small change to simplify for small LLCs with $0 revenue would be nice.


When you hire someone to do your taxes, you are still liable. So learn how to do it yourself first!


When you hire someone to fix your car, you are still liable (to have it break), so learn how to fix it yourself.

When you hire someone to fix your body, you are still liable (to die), so better study all the medical textbooks and stay on top of latest research.


When your service station or doctor screws up they lose thier certificate. When your tax helper screws up you go to jail.


But when your doctor screws up, you die.


If you where required by the government to go through a monthly medical procedure witch could kill you, wouldn't it be wise to at least know the basics ?


I don't think you should be downvoted, but I disagree.

It's really easy to screw up trivial business tax returns if you don't know what you're doing.


The z3t4 comment said "First".

I take that as: learn how it should be done, hire the pro, but with the ability to question/review what they have done. Sounds like sage advice to me.

Same goes for the mechanic or doctor...

Assuming you have the time of course.


C = expected cost of screwup, P0 = probability I'll screw it up, P1 = probability an accountant will screw it up

If (P0-P1) * C is more than what the accountant charges, I pay him to do it.


You should also take into account how much it would cost you to review it and how much it would cost you if they screw up. Actually learning basic accounting and tax law is much easier then the calculation you just did.


Having basically zero turnover is a good time to learn and make mistakes. When your business grow you should of course hire someone, but then you can confirm that it's done properly. When it comes to taxes you can't simply claim ignorance. If you want to run a business you have to know at least the basics. Being a CEO and not knowing this stuff is embarrassing.


Canadian lawyer and entrepreneur here. The Canadian equivalent is a Federal corporation ($200 filing fee + $20/yr). The government's online step-by-step system does most of the work for you, but doesn't touch the share issuance part. You'll need to do that yourself but there are lots of resources available online for how to issue shares to yourself.

The main cost is hiring an accountant to do the tax return for you. Or figuring out how to do it yourself using software like TaxTron.

If you have employment income + your side project involves a lot of ongoing losses then it may be a good idea to use a partnership or sole proprietorship for tax reasons.

Talk to your lawyer/accountant. There are fewer lawsuits here so you may decide a sole proprietorship (unincorporated business) is fine. Each province has some equivalent of a "Master Business License" that allows you to use a name other than your own for business purposes (so you can cash cheques, etc.).

To conclude (for Canada): generally startups go with a corporation. Side projects might be a corporation, a partnership or a sole proprietorship.


    The main cost is hiring an accountant to do the tax return for you. Or figuring out how to do it yourself using software like TaxTron.
Not that I have anything against accountants, but what kind of effort are we talking for filing the taxes yourself? 5 hours vs 1 for a personal income tax return? 10 hours? A weekend? How many pages are there for a corporation (in the simplest case -- I'm sure there is quite a range)?


Here's the main T2 form: http://www.cra-arc.gc.ca/E/pbg/tf/t2/README.html

If you're annoyed about the cost now, wait till you find out about major firms outsourcing work to India and elsewhere for routine tax work.


Depends on the state, but coming from one of the more complicated ones, you can do your LLC related tax duties in a day assuming you've done the requisite and semi-substantial reading.


Some tax forms don't have much for software options either, so you end up doing a lot of manual calculations. I've never come across anything for OS X that will do 1065 (the equivalent of 1040 for LLCs, general partnerships, and a few others).


You could also pay an accountant for a year, and then you have a copy of the forms they prepared, and you can ask questions. At that point, you have a template you can use for future years.


It's not about effort but rather risk, specifically the risk of filing incorrectly and getting fined (or worse, audited) by the IRS.


> 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?


>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


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.


>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

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.


This hack is not a good idea. In most states you have to pay that year's franchise tax (the $800 in CA) before you are allowed to dissolve the company or surrender your qualification, and there are also filing fees for each of these things so you will never save money doing this way and will instead pile up more fees.

In general legal and tax is not the place where you want to be trying to innovate.


>In most states you have to pay that year's franchise tax (the $800 in CA) before you are allowed to dissolve the company or surrender your qualification, and there are also filing fees for each of these things...

Actually you would not have to pay the CA $800 franchise tax so long as you dissolve/cancel the qualification before the yearly due date and there is no separate filing fee to cancel the foreign LLC qualification in CA.

The only time the $800 fee would need to be paid is if the business was not dissolved/cancelled before the annual due date, then the $800 would need to be paid before CA would accept dissolution and CA will come after the franchise tax + penalties.

>In general legal and tax is not the place where you want to be trying to innovate.

Its not "innovation" its practice. And after you have formed thousands of businesses for people you can identify the best solution for their needs. I wouldn't recommend the "hack" for most businesses, but under a very specific set of facts where the LLC is just for liability protection and the CA $800 franchise tax is prohibitive, there are ways to do it at the trade off of continuity of the business, and this is one of the rare instance continuity might count for nothing.


I wouldn't recommend the hack to anyone, as what you suggested would be treated as tax evasion by the California Franchise Tax Board.


We are both lawyers, I don't know how often you have worked with CA secretary of State and Franchise Tax Board, but I will tell you this, in thousands of interactions I have never had the franchise tax board waive a $800 minimum franchise tax after it has been incurred. Even if the owner was indigent, the business not just dejure inactive but defacto inactive, and they just wanted to dissolve to avoid incurring additional penalties...Not once, ever, and they would initiate collection actions.

On the other hand, when it is legitimate - lets be careful not to read additional facts here - an owner may dissolve an LLC before incurring the franchise tax obligation and open a new LLC...even with the same name, and it is not tax evasion. Obviously returns are a separate issue and final returns, even with no income or loses, would be filed. A side project with no income is a perfect example of when this might be done properly without issue.


I think California just likes taxing businesses.


To be fair California likes taxing everything ;-)


Try New York... a friend got tied up in a regulatory nightmare when he failed to renew his milk dealer's permit when he bought a gas station. He doubled the sin by selling milk from a farmer down the road without being bonded!

Check out the application: http://www.agriculture.ny.gov/DI/PDF%20WebDocs/NYMilkDealerA...


Not a Lawyer, but my understanding is that a single person LLC is a waste of time. When something happened and you were going to be sued they would sue you as a person and you as a business. Protection really starts once you have an employee or cofounder.

As a hypothetical: A domino's pizza driver causes a wreck, the victim sues the driver, and domino's pizza. The only entity protected in that case is the uninvolved individual domino's share holder. As the only actor you would never be the uninvolved share holder, you would always be the delivery driver directly involved in the accident. Therefore you always have direct culpability that can't be hidden by the LLC.


Not a lawyer or accountant either, but my understanding is that a single-person LLC is only useful if you're holding business debt: if your company goes bankrupt, your personal assets are much harder to go after. For liability, you're exactly right: you can't pass off liability to a piece of paper when you're the only person in the company.

I get flak for this whenever this discussion comes up, but personally I have a side project business, and it's a sole proprietorship. I looked into incorporation but could not find a single positive attribute to it, for my situation. My situation is: 1) I'm the only person, and 2) I have zero debt involved with the business. So for me, there just isn't any good reason to incorporate; it would only increase my costs and force me to waste a bunch of time on extra paperwork for nothing.

All these people touting incorporation seem to have several assumptions, one being that you must necessarily go into debt to start a business (not true), and the other being that surely you must have employees or partners (also not true). Just look at some guy who starts a lawn-mowing business: if he buys his own mower out-of-pocket, and does all the work himself, what the heck does he need a corporation or LLC for?


If it's an internet thing you can incorporate wherever you like. I live in Texas but filed in Wyoming because (a) the forms were super easy, and (b) IIRC the filing fee was $150 and that includes a registered agent.


This does not apply to California residents. In California you must pay $800 minimum to the state per year if you have a business nexus in the state.


How is "business nexus" defined?

IANAL, but if your project is purely a website, isn't the residence of you as the person pushing code irrelevant?


California defines nexus broadly:

Maintaining, occupying or using any type of office, sales room, warehouse or other place of business in California. This includes use that is temporary, indirect or through an agent or other representative. Having any kind of representative operating in the state for the purpose of taking orders, making sales or deliveries, installing, or assembling tangible personal property.


I suppose wherever your computer happens to be might count as a temporary office of some sort? Wow, that's brutal.


Should I incorporate as an LLC for my Donald Trump text to speech website [1]? I don't anticipate making any money on it, and built it for artistic / educational reasons. I don't know if I'm potentially exposed to libel or slander lawsuits. I honestly don't intend for it to be used in such a way, but I don't want to be hit with a surprise lawsuit.

$800 is a lot of money for something that isn't a business venture, but a lawsuit would be terrible...

[1] http://jungle.horse


Pending what state you're in, there are others with less of a minimum-tax responsibility. Delaware is a couple hundred, etc. vs. CA $800


I am not a lawyer, but I would not. There is a very small chance that you get sued here.


At what point should one form an LLC? I mean, let's say a project is not yet generating enough income to even pay the fees to incorporate, should the entrepreneur wait?

Just curious.


My usual advice is you want to incorporate when you either have (i) contracts with third parties, or (ii) other people working on the business with you.

It's a spectrum of risk, with coding alone with no customers on one end and a full fledged startup on the other. When you start signing contracts, you want the company to be on the hook for any breach of those contracts. And you'll probably want a separate bank account and a professional looking name on the signature line anyway. More importantly, if someone else is working with you, you need to make sure there's an entity that will own all the IP, and that ownership is clearly defined, with everyone subject to vesting to protect you from the co-founder walking away from the business.

disclaimer - I'm a startup lawyer but not your lawyer...


> disclaimer - I'm a startup lawyer but not your lawyer...

I completely understand and I respect that you're willing to even post anything at all.


It's really going to depend on the project and your exposure to litigation combined with your own net worth. If you can get sued and you own a home there's a risk where a corporate shield might be a benefit

The truth is if you're just living paycheck to paycheck it's pretty unlikely you'll get sued there's nothing to win. Blood from a stone and all that.

The key to assessing risk is figuring out what kind of damages your client can incur which is what they can recover via a suit.

One other note LLCs are not the preferred structure for taking investment S and C corps are better for this.


I would submit that LLCs are better than S Corps for investments. With an S Corp each shareholder must be a human resident of the United States. Any sophisticated investor will not personally take ownership of shares when making an investment but will do it via some type of business structure (i.e. a business that the investor owns or controls will make the investment). Since each shareholder of an S Corp must be a human US resident, investments become more difficult. An LLC can have members that are individuals, corporations, other LLCs, foreign individuals or structures, etc.


Fly under the radar until you build up some steam


its all risk/reward tradeoffs. Your side project blows up and now you're scrambling to become an LLC. There are two kinds of blowup, one is suddenly you're being sued and the other is your being pursued (as in a buyout).


From my research, if a LLC has a single person behind it, the protection offered is lower. "In many cases, the court will agree and the single member becomes personally liable for the business debts." (http://markjkohler.com/are-single-member-llcs-worth-it/#stha...)


I'm not so sure about this. The whole point of forming the SMLLC is protection and liability. It's difficult to generalize some of the author's claims.

IMO this needs a citation:

> In such situations, the plaintiff in a lawsuit against the LLC will ask the judge to set aside the asset protection associated with the company by claiming the company is a sham since it has no records and no Operating Agreement. In many cases, the court will agree and the single member [that’s you] becomes personally liable for the business debts.

That said, I am curious to hear more about whether adding a minimal second member, such as a friend paid $1/year makes any difference.

Disclosure: Single-member LLC owner. In my case, it's a purely software development company, so assets are minimal.


This. If joshuaheard would elaborate on this long-running debate


I don't think the number of people matters much. The key to upholding the liability protection (and not "piercing the corporate veil" - google it) is to treat the company as a separate entity, not your personal slush fund. That means only pay business expenses from the corporate bank account (have a separate corporate bank account), no personal expenses from the business account, and no business expenses from the personal account . If you must use the personal account for business expenses, have the company reimburse you, but try not to make many transfers back and forth.

The other most common pitfall (and there are many) is undercapitalization. Make sure your company has enough assets to do business. I would put in at least $10k to start, and then add $5k when you get low. $1k would be the minimum if you are on a budget, I think. Only pull out cash when necessary.

Conform to corporate formalities, ie keep your taxes and fees paid, and file annual information statements, or whatever your state requires.

When do you incorporate? It's a judgment call. I have a side project I have been working on for 3 years and I haven't incorporated. I would think when you start having significant public contact and sales, and you think it will become a permanent business, it might become worth the expense. The other is if you think it has significant value and/or there are multiple founders. You could also start with a contract and then incorporate down the road. There are lots of ways to go and plenty of material on this subject.


I wish there were laws for H1B visa holders to work on side projects. I had a chat with an immigration attorney and she said I can't even work on a side project because its still "work" outside of my H1B petition.

Going with an LLC is a far dream. I work on side projects but forced to not build something where I can charge for the service because it will be illegal for USCIS.

I know many people who do this (work on side projects, help startups for equity) and then create shell companies to move the money. Now that's really illegal and I don't feel comfortable doing that.


Have you not considered the "Limited Liability" part of "Limited Liability Company?"

If anything bad happens and you get sued, you can fold up your tiny little company and go back home. Where as if you're just a sole-proprietor, you can get sued for literally anything and everything.


This is simply not true. Did you miss the part about "limited liability"? The limitation to liability is your involvement in the action. If you're the only person in the company, there's zero limit: you're fully responsible for all actions of the company. You don't get to hide behind a sheet of paper just because you filed some LLC paperwork when your product fails and kills someone.


Did you read the whole comment?

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.


It's "limited" liability, not "no" liability.


What sort of insurance would you buy and where would you recommend buying it?


Most insurance companies offer business insurance. The most common is an Errors and Omissions ("E & O") policy. I have a general liability policy of $1 millions coverage that costs about $300 per year.


There's also specific cyber security insurance which is good for anyone storing user or customer data.


Good job


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... 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.")


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.


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.


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


> 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.


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.


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.


FYI if your income varies throughout the year you can reduce the penalty (if it's worth the extra time to you).

E.g. In the past I've gotten large checks in December which would have triggered penalty but I used Form 1120 Schedule AI and owed no penalty: https://www.irs.gov/pub/irs-pdf/f2210.pdf


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

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


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.


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


You're right, it is combined with your main income for tax threshold purposes, but I don't think HMRC would begrudge me a couple of hundred quid. It would probably cost them more than that to pursue it, or to even calculate the amount.


"filing fees" (confirmation statements) for UK limited companies are around £13/year (<$20)

shocking to see it's $800 in California


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.


Last I checked, Atlas pushed a C corp and did not allow formation of LLCs.


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.


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.


I've heard good things about incorporating LLC online with http://www.legalzoom.com/


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.


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.


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?


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.


It is much easier and less expensive to incorporate in Delaware. You're looking at $50/yr for a Registered Agent and ~$89 for your incorporation fee.


People will tell you CA still makes you pay the $800 as a CA resident with an out-of-state LLC. That is, if the FTC discovers you are operating in California.

A different friend has had 3 out-of-state LLC's over the last 6 years without CA discovering the fact mentioned above.


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.


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


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.


> 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?


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.


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


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)


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.


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.


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.


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.


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)


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?


>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.


> 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.


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.


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


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?


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


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/

https://flagtheory.com/stripe-atlas/


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


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/


> 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?


Nope, not that I have seen.


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.


> 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.


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


> 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.


No, double-tax is when you pay both federal and provincial income tax on the same income. Or when you pay corporate income tax on profits and then pay dividend taxes after that.

EDIT: though as a3camero pointed out, you get tax credits for this later case in Canada, so it's rare to get double-taxed in that case.


It's relatively straight-forward to keep corporate tax to $0 in situations where it would matter to you as an owner.

As others have pointed out, simply giving yourself a raise will avoid the corp paying taxes.


Often corporations distribute to shareholders using dividends. There's a dividend tax credit that offsets the corporate tax income (more or less). More broadly, there's a principle in Canadian tax called "integration" where the tax authority tries to make it so that it doesn't matter whether you earn the money through a corporation or personally. More information on integration: http://www.ey.com/ca/en/services/tax/taxmatters-july2013-int...

So, no, generally there's not "double tax". But yes, there is administrative overhead that could exceed the taxes if you're not making much money.


Another thing to consider is if you're ever going to sell it.

In my case I had a small project that I just claimed on my personal tax returns. I sold it to another Canadian company, and if it was done as a share sale it qualified under the capital gains exemption.

It was a fairly costly matter to retroactively separate the project and IP into its own company. The bulk of my lawyer and accountant fees were on this.


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.


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.


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/]

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]


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.


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.


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...

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


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?


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.


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.


If you're just starting off you probably don't want to deal with the hassle of dealing with the US and Canadian government. Cross-border tax issues are expensive to deal with and complicated. Many Canadian businesses sell to the US without incorporating there.


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.


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


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.


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

Thanks and could you elaborate on this please.


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


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.


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.


Did you use some service to set up a company, or did you do this by yourself? Was it possible to do online?


I used a service. I appreciated their advice and knowledge of the local environment.

I recall that at least in Ireland there were some online services marketed at setting up this kind of thing.


Which country did you choose?

And do you face doible taxation issues with the country where you live?


The tax situation is that the company's corporation tax will be paid in the country where it is registered. Although one does need to be a little careful also about where business is being conducted.

If I pay myself an income (not dividends) from company funds, which would of course be paid out before corporation tax, then I would be liable for income tax on that in my country of residence. Income from dividends (paid to shareholders after corporation tax) is taxed differently in different jurisdictions.




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