Online businesses......

[kendallshea82]

What is your business structure......sole proprietorship or LLC?

[grosgrainobsessed]

If you are a single member LLC you are essentially a sole proprietor anyway. Single member LLC's are considered a disregarded entity by the IRS and unless you specifically elected to be taxed as a corporation using a different form (and I would suggest talking to an accountant before hand, too) you would file taxes the same as a sole proprietor. And, the double taxation is a killer for the self-employed. Argh...

When I first started my business I formed an LLC under bad advice through a close friend and family member. Since it was single member I couldn't find any benefit, after much research and consulting with 2 sep. business accountants, they unfortunately, couldn't show me any benefits either. Not even for liability. It was basically a huge bust. I have since incorporated. It was a lot of wasted money, filing for LLC, paying fees, legal notices in newspapers, etc. to wind up realizing all I had was a fancy name for my business and really nothing else. Learned my lesson though. I would definately speak to an accountant - even if you have to pay for their time before forming an LLC or incorporating, or chosing to do nothing even. They can sure save you a lot of headache. Everyone's situation is different, so what works for one may not work for you, etc.

[Leona]

Do you think it is worth it even if you are a small at home business and what does it cost to be incorporated???

[kendallshea82]

Thank you for the info, that is good to know. I have spoken to an accountant and lawyer (friends) and they both recommended the LLC, but I wanted to find out what other people did. I also found out too that because I'm going to making the product, they said I absolutely must get general liability insurance too in case something happens to a baby/child wearing the product (i.e. choking, etc). Just having a disclaimer doesn't protect you. If you don't have good liability insurance, someone could sue you and take your personal assets. That gave me a good scare. Just because you are a small business, you still have to protect yourself.

[bugsandbows]

My company is a sole proprietorship, and has been for a couple of years now. I was advised by the small business admin. on this topic. Every major city has a small business admin. that will give you free advice.

[grosgrainobsessed]

The small business department really shouldn't be giving out this advice. They often give out misinformation as well. You know how government departments are, you can call 3 times and ask the same question and get 3 different answers from 3 different people everytime.

As for LLC, they don't offer much liability protection at all particularly for single member. That's a big part of the reason I felt kind of scr*wed after investing all that money into doing so. It was a huge waste. Because you still file as sole proprietor with a single member LLC and the IRS still sees you this way, it's likely that a judge or jury would as well in the event you should wind up in a legal situation. And, if that's the case, you'd still be personally liable including your personal assests. Incorporating offers more protection in terms of liability. LLC is still relatively new in comparison to other business structures, so there hasn't been enough time to test it out in terms of what actually happens to those that have LLC's and have been sued, etc. There seems to be a big grey area as to whether people are still considered personally liable when they are the only member of the LLC. You can talk to one attorney and they'll tell you that you are protected. Talk to another and they'll say, no, no case such and such was an LLC and because they were single memeber and they filed taxes as sole proprietor, they were held personally liable. Just like the attorney advised you, even if you had an LLC, you could still be found liable and taken for personal assets, hence the reason they recommended liablity insurance...so ya see, the LLC doesn't seem to offer the level of proection peopel think it does. Though, insurance is always an option to consider for everyone.

That was not worth the risk to me, so I incorporated. I would not think that anything is 100%, but incorporating offered me much more protection and peace of mind than the LLC, along with some tax benefits as well. The cost varies from state to state, and it varies pretty widely. It's hard to say whether it's worth it. I think what I would consider most is how serious you are about your business, if you are going to wholesale, if you are going to do shows, etc. If you are doing it as a hobby, I may be less inclined to bother with formaliziing the busines, but again, you must weigh your risks when it comes to liablity. That's why there is no perfect answer for anyone and you get so many conflicting opinions.

[grosgrainobsessed]

Originally Posted by kendallshea82

I also found out too that because I'm going to making the product, they said I absolutely must get general liability insurance too in case something happens to a baby/child wearing the product (i.e. choking, etc). Just having a disclaimer doesn't protect you. If you don't have good liability insurance, someone could sue you and take your personal assets. That gave me a good scare. Just because you are a small business, you still have to protect yourself.

I think this is important to consider no matter what your business structure is, especially since we live in such a litigious society and someone is always trying to find a loophole in the law. The added peace of mind and protection seems worth it to me.

Did your attorneys mention if you should get general liability or product liability insurance? I am also in the market for liability insurance and I know that most general liability insurance polcies offer some form of product liability coverage, but it seems that for anyone that manufactures their own products would be better protected by having product liability insurance, don't ya think?

[kendallshea82]

Yes, I agree. He suggested product liability and general commercial liability. This is all so overwhelming to me....I really never thought deep and hard about all I needed to do to get started. I did a business plan, but apparently that wasn't too thorough because this wasn't even part of it.

One more question.....Ideally I would like to structure as a sole proprietor because its the simplest structure and sounds like it is best suited for what I want to do. If I do that, and get product/general liability insurance, woudln't I be ok with that? Does incorporating just add that extra level of protection that treats the business completely separate of your personal assets? I read up on corporations and they just all sounds soooooo complicated, especially because my business is predominantly going to be online.

[grosgrainobsessed]

There may be tax benefits to you if you incorporate as well, depending on whether you go with S-Corp or C-Corp structure. My business is online as well, but the yearly tax breaks in self-employment tax saved me enough money to find the switch to incorporate valuable, even though, yes, it is a little more complicated. I had my accountant prepare and file all the paperwork this time, as I just didn't want to deal with it and I wanted to be sure it was all done correctly. He showed me the differences in my previous years taxes between filing as a sole proprietor (single member LLC) and being incorporated. Had I done it sooner, I would have saved about $4500 in income tax liability for 2006. So the way I look at it, since it is more complicated, I pay the accountant $250-300 to prepare my corporate taxes...but if I am saving thousands by going this route...so I am happy to do so.

Between the liability protection and the tax savings, it's the best choice for me. But, it sounds like if you are making sure you are protected in terms of liability with insurance (make sure your attorney is comfortable with the policy that you choose and the language and coverage seems that it WOULD indeed cover you under the types of lawsuits you would be most likely to be subject to), that continuing with sole proprietorship may be the best choice for you. Maybe for now atleast, and if things change within your business, it or takes off and soars you can re-evaluate your decision later on. I would recommend opening a bank account specifically for your business and keep all the funds, expenses, etc. separate. Even if you can't open a business account, you can just open another regular checking account for your business.

[Leona]

For the ones discussing this subject(VERY interesting) what would you consider a business big enough for this type of legal action???