Furthermore, financial literacy also seem very, very low, almost as if the powers to be maliciously wanted to misinform people. "You get taxed on profits, not on revenue" seems like the fundamental axiom of business, yet here it is, present as "this one weird tip the IRS hates". See also "I don't want a raise, it'll put me in a higher tax bracket".
Italy, Germany and SwitzerlanD just to pick 3 I’m familiar with, are nothing like U.K./Estonia
On the other hand incorporating a C Corp in Delaware costs between $89 and $399 and you can do it online by yourself
In all, this is about 1400€ excluding VAT for getting started, excluding accountant or fiscal adviser fees.
Then there is the yearly social contribution of about 350€, even with zero turnover, and more, before you have booked your first cent of revenue.
However, the law then requires that you have an external auditor of your company's books, which runs 1.5-3K for a one-man operation doing uncomplicated things.
Sole proprietor is easier, and you can do your books yourself, but then the liability is unlimited.
I think you'll find many of the southern EU states are similar, the incorporation may be cheap but the accounting is less so.
For all of them, you can do it yourself and most of them completely online.
[0]: https://www.service-public.fr/professionnels-entreprises/vos...
Edit: yes, it's not entirely online, but it takes half a day to complete
- Online (with a citizen ID card reader)
- A fully registered Ltd company within an hour (that's the gov marketing slogan)
- Costs ~ 360 EUR
The Danish government values entrepreneurs, especially ones that keep 40,000 DKK in their company bank account.
* Forming a full GmbH will cost around 1000-2000 EUR for lawyer,notary,tax accountant. You strictly speaking don't need lawyer nor tax accountant, but unless you are very familiar with the process, I'd recommend you enlist their services. It will make your life substantially easier. You will also need at least 12500 EUR in cash that will be the founding capital for the GmbH - you'll need to underwrite a security for another 12500 EUR for the rest of the founding capital or just pay a total of 25000 EUR for the founding capital. You can have the new company pay all fees from that founding capital. It's there to be used, you can pay yourself a (reasonable) wage from day one, if you choose to.
* Forming a UG is substantially cheaper: Founding capital is at least 1 EUR (though you should have more or you'll bankrupt the new company when it needs to send the first letter), there's form contracts that cover trivial cases (up to 3 shareholders, even distribution of shares, ...) and in the simple cases, all fees and notary costs should be in the low 3 digits. Keep in mind that moving money in to and out of limited liability companies is not trivial, so you should have sufficient founding capital to cover the initial expected expenses.
If you don't need the protection of a limited liability company, you can always opt for just freelance status - that's a simple registration at the tax office or, if you're multiple people, form a GbR (either by contract or implicitly, but I would really recommend a written contract). You can then register the business online.
Can you not, as an owner or director, loan money to the company to cover initial expenses? In the UK it's common to run a Directors Loan Account.
With the DLA you can lend money to the company to start things up, or pay for things personally and claim expense from the company if that's simpler at first (even company formation fees can be claimed like this) which can then sit in the DLA, or use it to borrow (a limited amount) from the company for a short time to smooth over salary/dividend payment planning.
You have to be careful to account for each transaction between personal and company, but if you understand that it seems not especially complicated, and certainly doesn't need founding capital. With my recent company the founding capital was £1.
* a shareholder loan is treated like capital - it’s the last loan to receive payment if the company folds. Probably not a problem in most single person LLCs, it important to keep in mind when it happens. If you pay your own loan and default on another, that’s a crime.
* you cannot in general make up arbitrary terms. The loan must be made with terms that a third party would agree to (“wie unter fremden Dritten”). That means you should - even for your own company - have a contract in place.
Borrowing from the company is possible, but if you give yourself too favorable terms, this could end up being treated as a hidden payment (verdeckte Gewinnentnahme) and that’s tax fraud. Tax litigation has the uncomfortable rule that the burden of proof is reversed- you need to prove your books are in order. If you can’t, tax authorities win the money.
Same if you start paying yourself a salary, but end up not paying on a regular basis. It’s ok if it happens a few times, but a salary should be somewhat regular.
I’d say it’s generally easier to pony up a little cash to cover the initial expenses if you can. I don’t see too much benefit in not having at least some founding capital. You’ll have to come up with the money anyways and it’s not going to sit in the bank account unused.
It’s better to find other ways to make things smooth. For example you can be managing director without drawing a salary.
Just some data points from the UK, not disagreeing with the parent comment.
Lending to the company is useful as an alternative to posting a large amount of _initial_ share capital, which you might simply not have, or not want to declare at first. For example, if you have a main job, and you are starting a company for a side project (to give it clearer legal structure or other benefits of incorporation), and don't have savings to put in. Rather than wait until you've saved up, you might start the company with minimal share capital, then add project funding over time from your main job salary by way of directors loan rather than issuing more shares and all the complications that go with that.
In the UK it's simpler, especially for small, short term director loans:
- When lending to the company, the terms don't have to be those a third party would agree to. It's ok to be interest-free, or to charge interest. If charging it's personal income for the director and personally taxable as interest, and a taxable business expense to the company For a one-person, 100% owned company it will generally be favourable to not charge interest, as well as simpler to document. A drawn up contract is of course advisable, especially for loans with interest, to document what's going on especially for authorities, but it can be a simple one.
In one-person companies it's common to lend to the company as a side effect of other things, for example deferring an agreed salary payment, dividend, or sale of property into the company posted to the loan account instead of paid as cash.
- When borrowing from the company, below £10k and for a strictly limited timing relative to the company accounting year, a director can borrow interest-free without involving taxes (as long as it doesn't follow a pattern that would be deemed an advance on salary instead, then there would be tax/NI implications).
- Otherwise, if insufficient interest "hidden payment" can occur, which we call "benefit in kind", and it's dealt with legally by paying tax on an amount you or your accountant can calculate. Helpfully, an agreeable interest rate is formally specified by the tax authorities; if it's paid there's no benefit in kind to worry about anyway. There is no need to evaluate and document what a third party might agree to.
In practice, the smaller type is not uncommon, and can even occur by accident, for example if a director mistakenly pays for something personal on a company card, that's recorded as DLA until it's paid back or covered by something else.
I suspect financial literacy is low everywhere.
Source: had single member CA LLC and wasted $800/year for a few years on it.
No, it's not; both for federal and California tax purposes, a single-member LLC chooses whether to be taxed as a corporation (i.e., separately) or as a “disregarded entity” (directly on the owners taxes as for sole proprietorship of the single member is an individual, on the owners taxes as a corporate subsidiary or division if the single member is itself a corporation.)
> It won’t protect you from lawsuits
Yes, it does mean that, absent the conditions for piercing the veil which apply just as they would to any corporation, you are protected from liability for the liabilities of the company. That's the LL in LLC. If you properly observed the formalities of LLC operation, it does protect you.
> you’ll still have to provide personal guarantees on loans, etc.
Well, yeah, if you have a baby business that has no evidence of being credit worthy and no way to secure it's debts, it'll need some guarantee of payment before people will extend it credit. That's kid of obvious—why would someone extend credit to an entity with no demonstrated ability to pay with no one else on the hook?
Apparently the process of adding or removing partners is, at least in my state, very simple.
My dentist and I don't have much in common so we talk about things like this. Well, he talks, I kinda mumble, under the circumstances. Are LLCs normal for dentists in general or dentists in your state or dentists in my state? I donno, I should ask him next time.
I would imagine all sorts of small service businesses with multiple partners would benefit from this situation, ranging from lawn care to IT field service to law offices. I wonder how this situation interacts with long term inherited family businesses?
This sounds misinformed. The point of an LLC as far as I have always understood it is that if someone sues your company they cannot take your personal assets as collateral but only that which belongs to the company. If someone sues you, you can lose a crappy small LLC or would you rather lose your home as part of a settlement cause somebody is a monster.
Feel free to correct me if I am wrong on this or if this is a misconception.
The creditor wanting to pierce the veil is, unsurprisingly, not a sufficient legal condition for piercing the corporate veil, otherwise corporations and LLCs (not just California and not just single-member) would be worthless.
Of course, a sloppily-run LLC is more likely to result in piercing the veil, and a single member LLC that the owner views as a maintenance free magic shield is particularly likely to be sloppily run.
I'm not a lawyer, but this happened to my dad a couple of times in his life. The first time, he lost control of his business and had to declare bankruptcy. The second time, it was dismissed.
Edit: For those curious. Having "policies" written down and following those policies to the letter will save you if you are ever personally sued for something your business does.
It vastly reduces the expected value to them, and thus the incentive, and the expected cost (legal and liability) to you, but no, it's not an absolute shield.
> . You can try to claim "it was the business's fault" but if you're a single member LLC (with no employees) this is very difficult
Well, yes, but the problem with that isn't “single-member LLC” (for which the standard is pretty much the same as any other limited liability entity) but the “you’re” part: a key requirement of maintaining limited liability is that the entity is operated as a distinct thing from the principals. If you view yourself as not distinct from the LLC—that the LLC is something you are and not something you have or operate—that's a pretty good sign that you are thinking about it wrong from the start.
Very subtle catch. I meant “you have” but still, I wish I could give you more upvotes.
And unless you happen into some money tree-esque line of work it is going to be damn near impossible for a one person LLC to not do things that will get the veil pierced, especially in a business unfriendly regulatory environment where the small businesses are already spread thing by other requirements. The plumber who is unwilling to use his van as a personal vehicle and use his personal checking account as his slush fund is going to get out competed by the plumber who is. The vast majority of single person LLCs simply do not have the luxury of having enough cash on hand to separate things to the extent necessary to be protected.
If you don't have the ability to operate a distinct entity, you shouldn't choose the business form designed for that express purpose and offering benefits conditioned on doing so.
I don't know that the vast majority of single-individual LLCs are actually doing it wrong, though, especially in California where the required cost at least encourages some thought about what you are going to get out of it that justifies it.
My personal experience was that banks will start treating your LLC as an entity that isn’t an extension of you when you start getting up to a few million USD in revenue. Then you are likely to have assets like accounts receivable, signed contracts, inventory, etc. I may be wrong here, as I didn’t get to that level, but I remember conversations ending with “we can help you when you’re making 3 to 5 million.”
I'm not sure I'd pay that much for the benefits of an LLC in California, but I'd certainly pay $8 in NY or $0 in Texas.
- This depends what you are doing with your business. Doing some software consulting on the side and making 10-20k/year from that? You probably don't need it. You have to decide for yourself what your chances of getting sued fare, but for many people, they are zero to negligible. The chances of getting sued go up quite a bit once you start to employ people though.
- IANAL, but I get the impression that if you do everything right, then piercing that corporate veil isn't so simple. If you start treating the LLC like an extension of yourself, then you run a risk. So don't buy cars or vacations (or any non-business expenses) on the company if you want to maintain that separation. Also, don't commit fraud or other things where the court might find it unreasonable to let you hide behind a corporate veil (if you sell $100,000 in counterfeit prada purses to an unknowing buyer, and then take that money and transfer it from the LLC to yourself, the court probably won't look favorably on that). Also, make sure the company is well capitalized enough. If you open up an LLC and put $10,000 on the credit card without any reasonable expectation that you'd be able to pay that expense, and the court agrees, you might see the corporate veil pierced. But in general, if what you are running is an actual business, there's probably a fairly good chance that piercing the corporate veil will be hard (doesn't mean people can't sue you personally... the question is whether they will be successful in doing so).
- For some people, paying $800/year is worth it for having something that sounds more official. Telling a customer that you are Acme LLC sounds more official, which is worth something.
- I do some side consulting and live in a state where LLC fees are much lower (~130-ish/year). I don't really need the legal protections (the most my customers would reasonably do is ask for their money back, which I would probably do anyway if they were unhappy, rather than deal with a lawsuit). But I like having an LLC with it's own bank account and credit card for tax purposes. It gives me piece of mind that i have completely separate accounts for business expenditures that I can point to in case I were audited, even though my risks of audit are pretty low. That said, I probably wouldn't do it if I were paying $800/year.
> "A court will pierce the veil only if a failure to do so will result in an injustice. This requires more than evidence that a creditor will not get paid. It requires evidence that the corporation or LLC was used in some way to perpetrate a fraud or accomplish some other wrongful purpose. For example, if the shareholders or members formed the entity knowing that they were not providing enough start-up capital to satisfy its contractual obligations, or intentionally moved the company’s assets out of a known creditor’s reach so that the debt could not be paid.
Actions such as those may be considered by courts as abusing the corporate or LLC form. For example, an Alabama court pierced the veil of a solely owned corporation that was hired to do construction work on a house. The shareholder testified that the corporation had no money when the contract was made, that she made no attempt to make sure the corporation had enough money to complete the project, and that she and a friend used the corporation’s bank account – which consisted only of the funds from the plaintiff - for personal purchases at jewelry and sporting goods stores, car services, restaurants, and more."
I wonder if this is correct. Many places require you to deprecate assets such as computers over many years, so the deductions are not all taken out of your profit the year you buy them.
Sounds like this article is conflating the legalities of setting up a business with the accounting of operating one, two different things.
It's likely that in some accounting regimes you have to to this, but in my own experience with a small business in the US, multiple accountants have simply depreciated assets like our computers immediately. When I originally questioned this our CPA said we could depreciate it over several years but it wasn't necessary in our case (small enough [asset] value and lifetime) and not worth it.
As it stands I imagine if someone is spending $1,000 per year on "servers" these are non-depreciable cloud service expenses.
If you bought (and own) servers, you must depreciate and amortize them. These are capital expenditures, aka capex
If you rented servers (e.g. AWS, GCP), you deduct the entire cost when it is incurred (or realized, depending on the details). This is an operational expense, aka opex
the stimulus programs specifically included them and the SBA asked no questions
you do still want the liability protections, more disciplined separation of assets and accounting by having an incorporated name, and deterrent to people looking to sue, alongside additional levels of anonymity if you choose which can further deter potential creditors
they can also make elections to parallel regulatory or tax regimes, which you don't want to alter on your personal body. such as election 475 for active traders, converting capital gains and losses into ordinary income allowing for unlimited tax deductions on losses, instead of the default status for capital.
or setting up "blocker" corporations in other jurisdictions to help other people avoid onerous default tax regimes.
My thinking is - if you are engaged in an ongoing concern, especially if it is responsible for your livelihood, it makes so much sense to explore incorporation of some variety. This could be for no other reason than to split out business vs personal finances and records. As you explore various financing, tax, and legal scenarios though, the cost to form and keep an LLC (or then choose S-corp taxation...) make it completely worth the administrative overhead.
Second nature to me. Not that costly of a “hobby” and I’ve let them go delinquent temporarily if I have a disruption in income.
I’m often sitting down at a local bank branch opening a new account for one.
But I would also say consider Transferwise for business bank accounts. Super easy and you can get Euro SEPA region accounts for your US entities as well. (Without Transferwise update, this is actually hard for American citizens but it might not be something you ever encounter.)
I never do a local/“foreign” llc filing unless the state is fining me to do it.
Can’t really relate to the idea of debating to incorporate. I know the unknowns can be daunting but sole proprietorships are lazy.
A LLC just (hopefully) gains you liability protection and perhaps a bit more legitimacy, in return for a big fee in California.
> 2. Tax benefits. You can deduct qualified business expenses from the total income of the business. Here’s a simple example: If you spent $1,000 on servers and your website made $10,000, then you’ll only pay taxes on the $9,000 in profit.
You don't need an LLC to deduct such expenses. Even sole proprietors can deduct business expenses against business profits.