New business

[alex8111]

I am currently in the process of starting an internet marketing company, however, don't know what my first step is so I can do business legally in California.

To get started, will a business tax license from the city suffice? or do I need to be a corporation?

Some basic information is greatly appreciated. Thanks.

 

[Michael Wechsler]

I am currently in the process of starting an internet marketing company, however, don't know what my first step is so I can do business legally in California.

To get started, will a business tax license from the city suffice? or do I need to be a corporation?

Some basic information is greatly appreciated. Thanks.

You can legally do business as yourself but you may be held personally liable for the debts of the company. This is known as a "sole proprietorship." Generally it is popular to start a small corporation of some type -- there are various kinds such as S corporations, LLCs, PCs, etc. These are different types of corporations, some of which you can choose from.

When you have a sole proprietorship, this means that creditors may be able to seize your personal assets should something go wrong unexpectedly. The primary reason why corporations are set up -- limitation of liability. I will limit the types of business organization forms since you will probably not want to set up a "C Corporation" which does not confer benefits on small business owners and is usually a good choice for larger entities.

S Corporation

Also known as a subchapter "S" Corporation, it is a type of corporation that elects a special tax status by enabling the shareholder to pass through earnings and profits directly to their personal tax return. The main advantages of forming an S Corporation are as follows:

• Limited personal liability of the owners/shareholders for business debts
• Owners/shareholders can use corporate losses to offset some types of income
• Can take "distributions" from the company instead of salary and thus not pay employment taxes
• Supposedly less risk from government audits as opposed to sole proprietor or LLC
• No double taxation because the corporation is not a separate taxable entity

Limited Liability Company (LLC)
AnLLC is a hybrid organization designed to provide the limited liability features of a corporation and the tax benefits and operating flexibility of a partnership. This form is most popular amongst sole proprietors seeking limited liability benefits and secure personal assets since it is simple and inexpensive to form. Advantages of an LLC include:

• US citizenship not required to own or invest in an LLC
• Owners have limited liability for business debts
• Tax: Allocation of profit/loss is not required to be proportionate to the ownership interests
• No double taxation since the LLC is not a separate taxable entity - it is similar to a partnership in this manner

Benefits of an LLC versus an S Corporation:

• LLC not required to deal with typical corporate requirements, e.g. holding annual meetings, formal minutes, etc.
• LLC members can divide/allocate the profit/loss as decided between them. Shareholders in an S Corporation receive dividends per share, regardless of how much effort each member expended.
• With an LLC there is no limit to any number or combination of business owners. With an S Corporation, only US States citizens and resident aliens may own shares.

Benefits of an S Corporation versus an LLC:

• You cannot provide licensed services as an LLC.
• Stock option plans to incentivize employees -- there is no stock in an LLC.
• Tax benefits - Medicare and Social Security taxes only paid on money received as wages/salary but not profits received through distribution of dividence or retained within the company. LLC members may need to pay these taxes when money is distributed.

 

[alex8111]

Thanks for all your help. Since I am barely starting out and will really take it slow in regards to how much money i will spend with on my new business, it seems that an LLC is what's best for me. Do you agree? Right now, it's just me and a partner starting from the bottom of the barrel and will work our way up...I'm also not a US Citizen. So do you think LLC is best for now?

But let's say that in the future my business grows and lots of money is to be made, will I be able to change from an LLC to a different type of corporation?

 

[Michael Wechsler]

Thanks for all your help. Since I am barely starting out and will really take it slow in regards to how much money i will spend with on my new business, it seems that an LLC is what's best for me. Do you agree? Right now, it's just me and a partner starting from the bottom of the barrel and will work our way up...I'm also not a US Citizen. So do you think LLC is best for now?

But let's say that in the future my business grows and lots of money is to be made, will I be able to change from an LLC to a different type of corporation?

My pleasure to help and good luck to you both. I can't say for certain without knowing all the details that the LLC is the best vehicle. It certainly is extremely popular, perhaps the most popular for small businesses. There are different ways to easily change the type of company when you need and that is frequently done in order to accomodate a different level of investment.