All I can say is "amen, brother." Not following his first 3 general purpose lessons have cost me if not millions, at least many hundreds of thousands of dollars. I urge others to commit these to memory:

+Really understand something before you sign it.

+Ask all questions, dumb questions, hypothetical questions, extreme-scenario questions, what if questions, until you’re sure you really fully understand it as well as anyone on earth.

+It’s also very worth paying for an hour meeting with your accountant, and asking 100 questions there, too.

He writes: Each separate business venture should usually have its own LLC. It’s very cheap through companies like LegalZoom, and well worth it.

If I plan to launch a few websites over the next couple years. am I supposed to create an LLC for each one? I think I've read elsewhere that you can form an umbrella LLC to cover them all.

What have your experiences been with this?

(FWIW: Before I do anything I'm going to meet with a lawyer... but the more background knowledge the better.)

There are legal ("asset protection") reasons that many taxi companies have each car as its own LLC, or ski slopes register each slope as its own LLC. So if someone has a legal problem with one, and you can really show that you've been treating them separately in your bookkeeping and bank accounts, it's clear to the creditor that they're not going to be able to go after everything you've got.

Then of course as they grow there are reasons why you may want to sell one of your websites, but not the others, etc.

The reasons why to do it are vague and different for everyone, but to me, it's a "can't hurt" and "why not?" type decision.

You go to LegalZoom (or any similar service) and pay $400. They mail you a certificate you bring to your bank to open a separate account. Total spent: $400 and 30 minutes of your time.

California is an exception: They make you pay $800 per year to the state for each entity. Most states it's only $50 and some states (like New Mexico) you never need to renew or pay any annual fees at all. If you're a virtual company with no physical office, you can set up your LLC in any business-friendly state you want. (Delaware, Nevada, Wyoming, etc.)

Outside the U.S., British Virgin Islands is the quickest, cheapest, easiest place to do it: http://www.google.com/search?q=bvi+corporation

> If you're a virtual company with no physical office, > you can set up your LLC in any business-friendly state > you want. (Delaware, Nevada, Wyoming, etc.)

I think this issue is very interesting, and I would imagine it's important to a lot of HN readers. So let's say you're developing software (e.g. for a website, an iPhone app, etc.) by yourself out of your home. Are you really "doing business" in your home state?

Unless I'm misinterpreting the parent comment, the answer is no. But if anything, it seems the opposing view may be more common. Specifically, many people say yes, wherever you're doing most of your work/programming/typing/etc. is where the business has "nexus". And if you're deploying a website, then there's the issue of the location of your datacenter, which could very well be in a different state.

What are people's experiences and thoughts on this?

Setting up an LLC in Wyoming will not shield your from tax issues in your home state (California or otherwise).

Those LLCs are such a headhache from a tax point of view, plus they depend so much on state and federal regulations. Good luck doing business internationally as well.

Why do you think we invented the 100% virtual company (http://fairsoftware.net)?

Granted, the liability part is not as strong as a clean LLC, but you are shielded from your customers, and you can work with pretty much anyone worldwide without having to worry about any paperwork at all.

In general you're likely to have to file taxes/annual reports in the state you live/work in, as well as the state the business is incorporated in.

Incorporation in Delaware or another random state is a needless hassle and expense for small businesses. Incorporate in your home state. When you get big enough that you have several accountants and lawyers employed by your company, they can tell you the benefits of shifting the incorporation to another state. Until then... it's a waste. Premature optimization, as they say.

I have to disagree, from experience. CD Baby was a Nevada corporation, though I was set up in New York when I started and Oregon when I left. I never had to file anything in Nevada, and there were no "needless" hassles or expenses.

Someone has to be the "resident agent" for the corporation. It's no harder to incorporate in Wyoming or Delaware than it is in Ohio or Arizona. The expense really is only $100-$300 a year to have a resident agent, and I've found it very worth it.

I'd rather have the LLC/corporation domiciled in a state like Wyoming, Delaware, or Nevada so that I'm free to be location-agnostic with where I choose to live or work. If you incorporate in California or New York you're going to really regret it when you move to Texas or London in a couple years.

Not all LLC's are created equal. If you're going to incorporate in your home state, make sure your state has a "strong" LLC.

NY has high costs as well: You have to issue public notice when creating a new LLC.

I've found that Earth Class Mail's Beaverton, OR street address (which has no add'l cost past the standard ECM fees) works fantastic. The Oregon SoS website lets you register an LLC online on the cheap, less than $100.

Does anyone know what is the Canadian equivalent?

> Outside the U.S., British Virgin Islands is the quickest, cheapest, easiest place to do it:

Please if anybody has any experience setting up a BVI please share here.

This is good stuff.

I've used Trident Trust : http://tridenttrust.com/jurisdiction_tbvi_companies.html - but I get the impression that all of these companies are similar : http://www.offshorebvi.com

1. Sign up and pay (about $1000 USD) 2. They incorporate same day 3. Next day they FedEx you your documents 4. Bring those documents to your bank to set up an account 5. .. ? .. 6. Profit! ;-) 7. Once a year you renew your agent fee with the incorporation company. Another $400.

That's really all there is to it. I don't know how it works out from a tax point of view outside the U.S., but in the U.S. it's just treated like a corporation in any state. I pay U.S. taxes on my income, worldwide, so there's no tax benefit to a BVI Corp for a U.S. citizen.

But I've heard there are big advantages if you're not a U.S. citizen. Since you're only taxed on local-earned income and your BVI company is not a local company, etc. That's all I know.

You the man sivers!

Gosh, I wish we had the LLC option here in Norway. The only "real" similar alternative we have is an AS (Aksjeselskap, "stock company"), which requires a minimum of 100 000 NOK in company capital (about 16 000 USD).

The other viable option is a Norwegian foreign registered company (NUF). This means that I can create a company in a different country (e.g. England), and then register a company branch here in Norway. The problem is that these companies have gotten a bad rep in Norway, so you might find yourself in a bad position with the banks, as well as your customers.

Yep, this is one of the very real problems with "Europe", which, by and large (and with a few exceptions like the UK and Ireland) makes it very expensive to start a company. It seems stupid to me... I mean, go ahead and slap high taxes on profits if that's what you choose as a society/country, but at least wait until there are profits to tax before you ask for a lot of money.

Sure, I know the capital can theoretically be invested in your company, but 16K is potentially a lot for a web business...

Incidentally, I'm curious about the foreign company option. Any other Europeans want to comment on how that works out in your country? I'm vaguely curious if I could link one up in Europe with DedaSys LLC without spending a fortune in bureaucracy...

I am glad you put "Europe" in quotes, because it's a diverse place etc.etc. That said, European unification has made possible a few new options for startup companies. There is now a 'European Limited Company' form, and it is also possible to register a company in any country from another country. For that last option the UK Ltd. route is very popular. Here in Belgium there are certain restrictions to starting up a limited company (minimum starting capital, diploma or experience needed, no bankruptcy in last 10 years etc.) which don't apply to UK limited companies. Apparently it's possible to start a UK limited company and conduct business in a different country, paying taxes in that country etc., as long as you have a return filed with Companies House and pay the yearly fee. EDIT: Just noticed the grandparent already mentioned this second option, oops.

How about an Irish Corp? They have a low tax rate. 12.5% and tax treaties with a bunch of countries. This should allow you to get dividends or capital gains at a more favorable rate. Tons of high tech companies have set up their European operations hqs there, using it as their nexus for all Euro profits.

Yeah, but remember that the 100.000 NOK only needs to be in the bank long enough for the auditor to verify its presence for Brønnøysund. It's not uncommon to set up a chain of companies, owning each other, using the same 100.000 for all of them, just transferring it along.

Of course you'll still be liable for the whole amount in case the company goes bankrupt...

Each business should have its own company. Are these web sites separate businesses? Or are they different faces of the same business?

I have five web sites, but two businesses. Each business has and is its own presence and personality. Each web site clearly belongs to exactly one of those businesses.

Seems like the 'transaction costs' (registering the LLC, bank account, etc...) could add up unless the sites really are independent, perhaps with different people working on them.

A series LLC is another option: http://en.wikipedia.org/wiki/Series_LLC

is this the same as what was discussed here: http://farm4.static.flickr.com/3613/3324835985_f8339dd2cf.jp...

here's the HN link: http://news.ycombinator.com/item?id=504151

I don't get it...didn't you need to file before that point? Wouldn't you have found out this info the first year you paid taxes? At which point you would have just been starting out, and the "buyout" would have been for pennies since the company wasn't showing profit

How would his taxes have reflected the percentage of this company he owned? You pay taxes on your income, which wouldn't be affected here. You pay capital gains tax on stock when you sell which he didn't do at any point.

When you are a stockholder in a company -- LLC or subchapter S corp -- you prepare a K-1 for the owners in the firm, who each pay taxes on the passthrough income.

In order to calculate personal tax due, the form includes the percentage ownership, which is also reported to the IRS.

So the commenter is correct; I'm not sure why this wouldn't have been discovered earlier, unless he wasn't doing his taxes (even if there's a loss, taxes should be filed to claim carryover losses).

If he had 3.3 million to buy out the company he probably was not filling out his own taxes.

It wouldn't...but it should have given him a headsup that he doesn't own 90% of his company early on. Early enough, so that if he decided to "buy" his dad out, it would have been for a much smaller amount.

I hope your dad got you a nice Christmas gift that year.

Why wouldn't his Dad just give him the $3.3M back after he'd paid it him?

It wasn't my dad that lent me the money - it was his company. So his company couldn't just pay me $3.3M for no reason.

If it was so why did your dad even make you sign a paper which said his company owns 90% of all your hard work, intelligence, creativity and luck for a meagre $20000.

If this is really true and he truly loved his son, he wouldn't have advised you to distribute shares for the investment instead of taking it on debt or heck something like a convertible debt.

Can't it licence your intellectual property to attempt to create a clone of CDBaby?

Maybe the licencing deal will cost $100k/month, including consulting services from you to build the service, and unfortunately, it will turn out that the cloned CDBaby service is not profitable, and so it will be shut down after 33 months.

You'll still have to pay corporation tax on it (or whatever the equivalent is in the US), but hopefully that's less than trying to extract that money out of your dad's company.

Note: IANAA

Ideas like that get people sent to prison. Better to be ethical and just eat the $3.3 mil.

I agree his idea is probably not a good method to pay the money back but what's unethical is collecting that $3.3 million, and then saying "oops", without finding a legal and legit way to give it back.

How is collecting a payback on a legitimate investment unethical?

His fathers business invested some money in his corporation. Now, from the story it appears that they didn't expect much of a return on this investment, but I don't think they acted predatory in any way.

I don't see why there should be any reason for a "payback" here, that is not how investing works, and quite frankly sounds very selfish and biased to me. If his business had completely failed and he ended up broke, would he be looking for a legal loophole to repay that $20,000 investment back to the company? I would tend to doubt it.

His scenario is almost exactly the model/concept of VC investing... Money is invested in seed companies knowing that it is highly probable it will be lost, but the slim chance of a large payoff makes the risk worthwhile.

It sounds like you didn't really read the post. His father "invested" (although it was more realistically a gift/loan) in his band. Years later when he started an entirely new and different business he reused his old bank account/business entity out of laziness/ignorance. His father had no ethical claim to that new business/money.

You are right. But it was his dad advising him. If he saw that his kid's business is growing big - he would have advised him to buy back shares much earlier and probably give him a personal debt to buy back shares. Why should an accountant enlighten him on what he owns.

The only reason I can think of without blaming his investor dad is his dad wants to shelter his kid all the time and doesn't think of him fit to run independently or doesn't want him to take that risk at all.

My interpretation of it was the the $20,000 investment was small change to the company, and was most likely never given a legitimate second thought by his father.

Right I understood your point and could be very valid. But for 90% owning, I have my doubts. Anyway what I felt was later when his dad would have seen his son's business blooming he should have done something about it. Asked him to buy back early or at least let him know that for all his work he owns just 10% and it just the first investment.

Gift tax would apply, even if it were an individual.

You could induce a period of low valuation to make a stock transfer though, thus costing less than the $3.3M.

Ouch. Big mistake, but great advice NOT to ignore the legal paperwork. As mind-numbing as it can be to go over contracts, NDA's, etc., you need to know what you're signing.

At least in his case it was his father, so he didn't have to worry about getting a raw deal there.

Kudos for publishing this example! I praise you for your civic-mindedness! (It takes guts to admit a mistake this big.)

Comments like this on a serious well written post with some good advice make me smile: "Ibod Catooga wrote on May 27th, 2009 Shit, negro, I woulda punched my dad in the NUTS if he tried that shizzle on me!" (http://sivers.org/mistake#comment-15816)

Beautifully eloquent.