Ask HN: When to establish an LLC or S-corp for a 1-person startup?

https://news.ycombinator.com/item?id=15909737

by siruncledrew • 9 years ago

8 6 9 years ago

news.ycombinator.com

For example: Let's say Sam is currently employed by SomeStartup, Inc. As an early employee, Sam has 5% of shares in SomeStartup, Inc that have vested.

Sam also wants to create his own startup on the side, and is currently the only founder/member. The startup will be a tech business, and Sam will make the website, host it, etc.

Sam will have his own startup, and then still work at SomeStartup, but perhaps transition to an independent contractor in the future. --- Courses of action: My (limited) understanding is that operating as a sole proprietor adds a considerable risk burden, because Sam could be sued directly in this case.

Even in the early stages of a personal startup idea, is it recommended to form an LLC? Are there certain tax or IP benefits to having the assets under an LLC as opposed to under a person in a sole proprietorship? Couldn't legitimate business expenses and travel be deductible either way? I am wondering about the factors that impact the timing of when to establish an LLC.

I have also heard about individuals establishing S-corps, but is that overkill for an early stage startup or a valid pre-emptive step?

Based on taking a look at the differences between LLCs and S-corps[0] it seems LLCs are much less of a headache for comparable benefit for very small startups, but again I am a novice in understanding business taxes.

I have also read about people creating Delaware or Nevada LLCs, but I am not sure what triggers that decision when the primary place of business is not in those states (unless it doesn't matter for websites with no physical place?)?

These kinds of scenarios are new to me, so any guidance or personal experiences are greatly appreciated, thanks!

[0] https://www.investopedia.com/articles/personal-finance/011216/s-corp-vs-llc-which-should-i-choose.asp

marpstar• 9 years ago

Assuming you're in the USA:

1. No real tax benefits vs. sole proprietorship. You can deduct the same amount of stuff. In fact, you're taxed in exactly the same way as you are today.

2. I formed an LLC after a few years of freelancing, mostly because I didn't want to send my SSN around on W9s via email anymore.

3. Fellow freelancers I know have established S-Corps instead, but unless you're making $100k+, it seems like a lot more work than a single-member LLC.

saluki• 9 years ago

If you're asked for SSN/Tax ID for W9 and/or affiliate revenue you can obtain an EIN number over the web and use that instead of SSN. (website can only be used during normal business hours for some reason.)

kjksf• 9 years ago

Personally I never went beyond DBA when selling software because I don't want additional cost and hassle of maintaining LLC or S-Corp.

People register LLC in Delaware because it's usually cheapest state, laws are most understood and there are plenty services to help you do that. For example, in SF LLC is at least $800 per year to maintain (http://sfosb.org/step-1-structure-your-business).

Protection benefits of LLC are vastly overstated.

If someone wants to sue your business, they will. Merely defending a lawsuit can bankrupt the business, regardless of DBA vs. LLC status.

It's true that if you loose and that results in damages awarded, in some cases damages will be limited to what LLC can afford.

But in software business, where you sell $100 program or $100/year service, chances that someone can sue you for any significant amount of money are nil. That's why you don't hear about Word users suing Microsoft for millions of dollars because the software crashed and corrupted their work.

For software business the only time it would matter in practice is if you were to take a big loan and loose that money.

That is also unlikely because even if you were inclined to borrow recklessly, banks stay in business because they are able to assess risk of lending to you correctly.

Also it's important to note that there are limits to limiting liability. Bernie Madoff ran LLC and yet he's in jail. LLC doesn't shield you if you defraud.

The best way to limit you liability is:

* don't to shady stuff * don't borrow to fund risky stuff

prokes• 9 years ago

The point of the LLC or Corp is that if someone sues your business, they can't come after your personal assets. In the parent's case, this is their vested shares of startupcorp. A separate entity limits your risk.

matt_the_bass• 9 years ago

I’m think about this for a physical product company. I think from a product liability POV it makes sense to have a company.

My understand is scorp makes sense if you plan on employees. Llc if you don’t.

Digory• 9 years ago

It depends a bit on where you are. In states with cheap LLCs, it is ‘worth it’ almost immediately. LLCs protect your personal assets against business liabilities caused by other people. If you have substantial personal assets, and the LLC is a $50-$100 one-time fee, it’s a no brainer.

Granted, the LLC shield isn’t foolproof, but when it works, it works — and by the time you know you’ll need it, it’s too late.

In states that charge a lot or that want ongoing fees, it it’s a harder call. In California, for example, the LLC triggers an annual state tax. The legal liability protections are still worth something, but you’re taking on some more substantial obligations, too.

Ask HN: When to establish an LLC or S-corp for a 1-person startup?

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