Incorporate Business Online: Small Business Incorporation & Starting A LLC
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Incorporating your Internet business, whether you sell information products, physical products, services, software or are an affiliate, is a necessary step to make your business real. When customers visit your site, they want to see that a bona-fide company is behind the product or service they are considering. Who would you rather buy from, some guy with a website or a company that projects an image of expertise in their field?
What I’m getting at here is that incorporating your Internet business legitimizes it not only in your customers’ minds, but in your mind as well. When you know you have a business to run (as opposed to having some website to make a little money), you are more likely to treat it as a business. Aside from the psychological benefits, there are also very tangible benefits to consider.
We like the Limited Liability Company form of incorporation for Internet business. If you are an individual, starting an LLC is often as simple as filing a form with your Secretary of State’s office and paying a fee. This can often be done online, so you don’t even have to go out! The laws and fees are slightly different in every state. Most have them broken down from the tedious legalese into readable summaries that regular people (non-lawyers) can understand. Always read them before you start!!!
LLC Advantages
According to the IRS: A Limited Liability Company (LLC) is a business structure allowed by state statute. LLCs are popular because, similar to a corporation, owners have limited personal liability for the debts and actions of the LLC. Other features of LLCs are more like a partnership, providing management flexibility and the benefit of pass-through taxation.
You can read the full corporation comparison chart below. Those tangible benefits mentioned earlier are easiest to manage and maintain under an LLC. LLC benefits are:
- Pass-through taxation: The IRS can treat you as a “disregarded entity”, meaning that like a sole proprietorship, you report your income and loss on your annual 1040 Schedule C tax forms instead of having to file complicated corporate tax forms.
- You can also be taxed as a corporation if you so choose (but we don’t recommend this for a single member LLC).
- An LLC, like a corporation, provides personal liability protection from business debts and legal actions; it separates you “the person” from you “the business”.
- Flexible organization structure (You are not required to have shareholders, a board of directors, executives, etc.)
- An LLC is easy to start. Depending on the state, a simple Certificate of Organization and associated registration fee is all you need to get up and running. This can often be done online.
- Low legal operating requirements (for most states): No corporate forms, annual meetings, meeting minutes, etc. Typically, again depending on the state in which you incorporate, you only file an annual report. Often, the annual report is just a re-filing of your certificate of organization – the only changes you make are to reflect changes in your business.
The question of whether to incorporate in Delaware, Nevada or Wyoming often comes up. It is true that a large number of big companies are incorporated there. Why? They have more business-friendly tax laws and general laws. However, as a small Internet business, it is not worth incorporating outside your home state.
If you are incorporating in Delaware but your company resides and does business from California, you would need to pay a “registered-agent” in Delaware. You need an address and a person to receive correspondence for the business. Hiring that person results in an added expense. Also, you will have to register with your home state anyway, but as a foreign LLC so you can legally do business there. That additional registration has a fee. You may also come across other fees, depending on the laws of your home state, when it comes to being incorporated in Delaware, Nevada or Wyoming. Overall, your best bet is to start your LLC in your home state.
| Sole Proprietorship | Limited Liability Company (LLC) | S-Corporation (S-Corp) |
C-Corporation (C-Corp) |
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|---|---|---|---|---|---|
| Formation | What It is | An individual doing business as an individual | An individual or group doing business as a legal entity | An individual or group doing business as a legal entity | An individual or group doing business as a legal entity |
| Best For | Small businesses that will remain small, have low exposure to liability and don’t justify the expenses of LLC or S-Corp start-up costs. | Small to medium size business, whose owners wish to enjoy limited liability protection, “pass-though” tax status, and ease in operating the business. | Small to medium size business, whose owners wish to enjoy the limited liability protection a corporation has to offer, and the “pass-through” tax status. | Medium to large businesses that choose to have more flexibility in attracting business capital from potential investors. The investors would typically become shareholders of the corporation. | |
| Ease of Operation | Easiest – no formal business requirements, file taxes on your 1040 (pass-through). | Easy – few formal reporting requirements, file taxes on your 1040 (pass-through). | Moderate – formal reporting requirements, can be taxed as separate entity or pass-through. | Difficult – formal reporting requirements, securities laws, double taxation. | |
| Ownership | Owners are called “Owner” or “Proprietor”. Ownership can be made up of an individual or husband and wife. | Owners are called “Members”. Ownership can consist of any number of members, including a single member. | Owners are called “Shareholders”. An S-Corporation may not have more than 100 shareholders. | Owners are called “Shareholders”. A C-Corporation can have any number of shareholders, including one. | |
| How to Start | Simple and inexpensive to create and operate. No state filing required. | Must file LLC Articles of Organization with the state Secretary of State’s office, obtain an EIN; Draft and sign LLC Operating Agreement if more than single member. Filing fees vary by state. | Must file Articles of Incorporation with the state Secretary of State’s office; Tax forms must be delivered to the IRS within a certain timeframe; Obtain an EIN; Draft and sign Corporate Bylaws; Hold and record initial Board of Directors’ meeting; Issue shares of stock. Filing fee varies by state. | Must file Articles of Incorporation with the state Secretary of State’s office; Tax forms must be delivered to the IRS within a certain timeframe; Obtain an EIN; Draft and sign Corporate Bylaws; Hold and record initial Board of Directors’ meeting; Issue shares of stock. Filing fee varies by state. | |
| Cost to Create | None | State filing fee required. Fee varies by state. Legal / Accountant fees may be necessary if you need help. | State filing fee required. Fee varies by state. Legal / Accountant fees – assistance recommended. | State filing fee required. Fee varies by state. Legal / Accountant fees – assistance recommended. | |
| Duration of Existence |
Dissolved if entity stops doing business or upon death of the owner. | Dependent on the requirements imposed by the state of formation. Often limited to a fixed amount of time. | Forever unless formally dissolved, can extend beyond death or withdrawal of shareholders. | Forever unless formally dissolved, can extend beyond death or withdrawal of shareholders. | |
| Transferability of Interest |
Ownership non-transferrable | Dependent upon restrictions defined in the operating agreement. Can be structured to restrict or permit. Often structured to restrict. | Shares of stock can easily be sold, but restrictions may exist in Shareholder’s Agreement. Must observe IRS regulations on who can own stock. | Shares of stock can easily be sold, but restrictions may exist in Shareholder’s Agreement. Must observe IRS regulations on who can own stock. | |
| Liability | Financial & Legal | Owner personally liable for all business debts and legal actions. | Members are not typically liable for the debts of the LLC. Provides some protection for members against legal action. | Owners have limited personal liability for business debts. Owners have some protection from personal legal liability. Shareholders are typically not responsible for the debts of or legal actions against the corporation. | Owners have limited personal liability for business debts. Owners have some protection from personal legal liability. Shareholders are typically not responsible for the debts of or legal actions against the corporation. |
| Operational Requirements |
Legal Requirements | Operation at the discretion of the owner. Accurate accounting for tax purposes. | Annual report required (depending on the state, this can be an annual re-filing of your articles of incorporation.) If multiple members, operating agreement and annual meetings recommended. |
Election of board of directors and corporate officers, annual meetings, meeting minutes, and annual report filing requirements. Formal reporting requirements vary by state. | Election of board of directors and corporate officers, annual meetings, board meetings, meeting minutes, and annual report filing required to maintain corporate status. Formal reporting requirements vary by state. |
| Raising Capital | Contributions from individual’s funds & personal loans. | Membership Interests may be sold to raise capital per the operating agreement. Securities laws may apply. LLC not appropriate for publicly-traded companies. | Shares of stock are sold to raise capital. Subject to securities laws. Limitations prevent S-Corporation stock ownership by other corporations. S-Corp not appropriate for publicly-traded companies. | Shares of stock are sold to raise capital. Securities laws apply. Publicly-traded companies are typically C-Corps. | |
| Capital Structure |
Personal funds | Transferable interests vs. shares of stock % ownership (may be transferable). Can issue more than one class of stock / ownership. | Shareholders free to transfer. Can issue more than one class of stock / ownership. | Almost unlimited number of shareholders and shares. Can NOT issue more than one class of stock / ownership. | |
| Management | Management | Sole proprietor has full control and responsibility over management and operations. | Members have an operating agreement that outlines management responsibilities. Can be structured for member management or manager management. | Shareholders elect a board of directors to manage business activities and appoint officers for day-to-day management. Shareholders can also serve as directors and officers. | Shareholders elect a board of directors to manage business activities and appoint officers for day-to-day management. Shareholders can also serve as directors and officers. |
| Tiers of Control | Individual | Members of LLC by consensus or as outlined in operating agreement. | 1. Shareholders 2. Board of Directors 3. Executives 4. Employees |
1. Shareholders 2. Board of Directors 3. Executives 4. Employees |
|
| Taxation | Income | Profit and loss reported on owner’s personal tax return. | IRS rules allow LLCs to be taxed either as a partnership/sole proprietorship or as a corporation. With the former, profit and loss is passed through to the members and reported on their personal tax returns. | No tax at the entity level. Income/loss is passed through to the shareholders. Owners report their share of corporate profit or loss on their personal tax returns. Owners can use corporate loss to offset income from other sources. Income must be allocated to owners according to their ownership interests. | Taxed at the entity level. Owners can split corporate profit among owners and corporation, paying corporate tax rate. Income that would normally be taxed at the corporate level can often be paid out in salaries and other deductible ways so tax is avoided completely at the corporate level. Double taxation: If dividends are distributed to shareholders, dividends are taxed again at the owner’s tax bracket. |
| Tax Entity | Not a taxable entity. | Can be taxed at the member level or at both the entity and member level. | Not taxed at entity level. Profit and loss passed through to the shareholder(s). | Taxed at both the entity level and the shareholder level. | |
| Fringe Benefit Deductions |
None | Depends on chosen tax treatment. | Better than Proprietorship but not as favorable as C-Corporation. Fringe benefits limited for owners who own more than 2% of shares. | Yes. Fringe benefits can be deducted as business expense. | |
| Employment Tax Flexibility | No, self employed. | Yes. Members can elect to treat themselves as employees or self employed. | No. Corporations must have employees | No. Corporations must have employees | |
| Accounting Year | Calendar | Calendar | Calendar | Fiscal or Calendar | |
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