Ask HN: Question about forming a company for side projects.

https://news.ycombinator.com/item?id=1696763

by jrussbowman • 16 years ago

37 27 16 years ago

news.ycombinator.com

What I'm thinking about doing is forming a LLC to run some of my side projects under. I'd like to look into seeing if I can make money both with advertising and selling services with at least one of my projects.

I'm self funding right now, and working by myself. I'd rather do a simple LLC with a simple operating agreement and then if one my projects turns into something I'd want get investors for, or investors want to invest in, I'd form a new company and transfer the assets to it.

The LLC would be to protect personal liability, I'd even be looking into what the costs are for liability insurance. However, drafting up corporate documents and forming a class c in preparation for what the future may hold is something I'm not comfortable doing right now as I've never done it, and I don't think I can afford a lawyer right now to do it.

Is that a logical plan, or is there something I'm not thinking about that I should be?

tocomment• 16 years ago

Let me know what you find out about the insurance. I've been curious about that.

lionhearted2• 16 years ago

At this point, I've twice - not once but twice formed corporate entities for projects that never got off the ground. I won't do that again unless I'm diving into a high liability field, or have ridiculously high assets that it's worth it from an EV perspective... your chance of getting sued selling basic advertising and contracting services are pretty low, and if you're contracting individually they'd sue you as an individual anyways even if they're not supposed to. This might protect your assets some if you lose, but you'd still be on the hook for legal fees to defend enough to protect yourself from personal liability.

My take - just get started. Form up an LLC once you get your first cash coming in. Ignore this if you have significantly high assets already. If not, this is probably being over-cautious, and the time and money is probably better spent elsewhere.

Edit: It's pretty trivial to assign intellectual property you own to a corporate you own too, if you ever want investors. If an investor wants you, not having an entity already won't slow you down. If anything, the wrong kind of entity is probably more of a hassle to transfer IP from and dissolve. Just get started.

arn• 16 years ago

But if you had formed a single entity for all your side projects, then it wouldn't have happened a second time (you wouldn't have to have formed 2 entities for projects that never got off the ground -- just one).

I think it's reasonable to start a single llc for your side projects, and to spin them off as needed. And is what I have done (and spun off 2 LLCs from the original).

The problem if you don't is that everything will get muddled in your personal finances and that's not a good thing. (I have no idea about the logistics if you want funding down the line, however)

lionhearted2• 16 years ago

> The problem if you don't is that everything will get muddled in your personal finances and that's not a good thing.

Good point, I'm not salaried so my finances, accounting, and taxes are already fairly complicated so that creating a new entity for a casual project doesn't make such a difference. Expenses for new projects are usually just a single line item in my budget. For someone getting most of their income from salary, it might make their taxes easier to have an LLC that shows a loss the first few years and passes that through.

What was the spinning off process like, if you don't mind elaborating? You start building in your personal LLC, and then if the project takes off you spin it off? Then you've got personal assets separately from your various LLC assets? Has it made enough of a difference to be worth the paperwork? (Also, a California LLC costs minimum $800 year, even if you lost money, so I assume you're not in CA)

enjo• 16 years ago

By definition everything in a LLC is muddled in with your personal finances. That's why it's a "pass-thru entity". For tax purposes, they really are one and the same.

rwhitman• 16 years ago

I have been in the same situation multiple times and I will concur.

It is not worth it to incorporate a business entity for something you don't have cash coming in from. It costs time and money, when there is no serious income or a direct business focus its just a waste of your personal resources.

A sole proprietorship DBA with a separate business bank account is sufficient to do anything you need until the time comes to incorporate. You will know it when the time is right

(Also note that I'm in California where they tax a flat $800 every year for operating an LLC regardless of income. If the side projects make nothing and year over year get charged $800 + tax & legal issues, it becomes a costly pain in the butt. I dissolved mine to a DBA last year. If it wasn't for that damn $800 LLC tax I'd probably have kept it...)

grandalf• 16 years ago

Be sure you check into the minimum tax... CA has about an $800 minimum tax on S-Corps and may have one for LLCs too.

rgrieselhuber• 16 years ago

It holds for LLCs too.

aaronblohowiak• 16 years ago

This is one of the things meg wants to get rid of

albahk• 16 years ago

I am doing the same, but in Hong Kong its called a Limited Liability (Ltd) company.

My main reason is for subscribers that have recurring subscriptions through Paypal and where there is no way to transfer payments from "Joe Citizen" to "Joe's Company Ltd" if it takes off in the future.

Also, if you want to apply for a merchant account then you must be a Ltd company. Its about US$1000 to get a basic LTD company registered in HK.

Konreu• 16 years ago

I would recommend spending some time reading "Inc. and Grow Rich!" (http://www.amazon.com/gp/product/B001OXCERE/). This book will help you decide whether incorporating is right in your situation; and, if it is, what type of corporation best fits your goals for the future. Incorporating has more benefits than just liability; see if any of these benefits are of interest to you.

klbarry• 16 years ago

Advantage to making an LLC: Interns of all sorts will work for you for free, even just doing your taxes for you, since you can give them a credible spot on their resume. My friend who went to Y-Combinator has an intern right now for that reason, it's great.

rpavlick• 16 years ago

This is very likely to be illegal.

http://www.mndaily.com/2010/04/22/unpaid-internships-under-i...

Encosia• 16 years ago

I've been using an LLC for my ad-supported websites' income, paid writing, and side consulting work for a few years.

I'm far from a financial expert, so I could be wrong, but my impression is that it's been very beneficial in the finance department. You can purchase an awful lot of things with effectively pre-tax dollars if they are legitimate business expenses (like that new MBP); things that you may have normally purchased with post-tax funds anyway.

I haven't needed to invoke its liability protections, but I've been told (by counsel) that the most important thing is to keep your money well separated. If you intermingle your funds or use business funds for personal expenses, that can be used to pierce the corporate veil and nullify your protection.

ahoyhere• 16 years ago

I've been told that the rules are more flexible for LLC deductions than they are for sole proprieters (freelancers), especially when it comes to writing off parts of a home or equipment that is not 100% business use.

The advice I was given was: for a sole proprieter, you have to prove that a thing is used exclusively for a business; for a corporation, you have to prove only that a thing cannot be used exclusively for non-business reasons.

iworkforthem• 16 years ago

I would suggest you do it the other way round; create more side projects, monetize them, form LLC. Not sure why you need to protect liability for your side projects.

dotBen• 16 years ago

Unless you have some big assets that makes you personally worth suing or, frankly, you are doing something slightly dodgy that you want some separation from, then I would only form the company once you are making a few $1000 profit.

When you create the LLC you will have filing costs, anual LLC costs ($800/year for a CA LLC), accountants fees... You basically don't want to be paying those until you have income to offset them.

You mentioned forming a company to do several side project with the view that if one takes off it will be already set up for investment and growth... well don't forget that all of your other side projects will be in there too and so investors will own those ideas too. You might decide that if a given business/side project is worth having an entity then it's probably worth having its own entity in its own right.

JangoSteve3• 16 years ago

I setup an LLC for my side projects and consulting a couple years ago. Since then, it has evolved into my consultancy that I now do full-time (in fact, my latest creation, LeadNuke, is a "product of Alfa Jango, LLC", and may be spun off if I decide to take any investment for it).

Forming an LLC really is not very difficult, and it's good practice to get started early if you plan on going full-time at some point. More importantly, the clarity boundaries it provides to your business expenses and taxes is worth the effort alone.

Single-person LLCs are legit and can protect your personal liability IF you run it like a legit company. People who form single-person LLCs have a tendency to get lazy with record-keeping and procedures. Don't fall into this trap. If someone sues you, and the judge looks over your records and says, "Yeah, but you didn't do anything differently than if you hadn't formed an LLC," personal liability protection is gone. This means, setup a separate business bank account for ALL business income/expenses, sign ALL contracts with your business name, make sure clients address checks and issue your 1099s to your business name, etc.

Concerning insurance, I wouldn't bother unless you're working on a project that has the potential to lose a lot of money if you do something wrong. If you work on an ecommerce application for a company that will be doing $50k or more sales a month through it, perhaps insurance starts looking like a good idea (god forbid you accidentally leave their merchant account in test mode when you deploy, and no one catches it for a week).

If you do get insurance, what you actually want is called Errors and Omissions insurance (liability insurance is for if you have a physical office and you want to protect against your equipment if there's a fire, or if a client visits and slips and breaks their arm). If you get E&O insurance, be sure to shop around, many of the big insurance companies won't do it for you, because of how new and unknown the web-based software industry is, so you might have to go with a smaller local insurance company to work out some policy that fits your needs.

EDIT: I should clarify that in Michigan, forming an LLC is incredibly easy. I'm not sure about California, if that's where you are.

Osiris• 16 years ago

As far as taxes are concerned, I understand that a single-person LLC is really no different than a sole proprietorship. The income from the LLC is passed through on your taxes (LLC isn't recognized by the IRS) and taxed the same as extra income plus self-employment tax.

After doing research, I decided against forming an LLC for my side-business (software) since it's just me and I don't expect to have any liability issues.

It's much more important to form a legal entity when you have a partner that you need to split profits with. In this case, I'm leaning toward S-Corp as it allows a lot more flexibility than LLC and doesn't require that you pay self-employment tax on disbursements as long as you take a reasonable salary.

rodh• 16 years ago

I have been recommending to self-employed people here in the UK to set up a limited company if they can, as taxes on dividends in this country are much lower than those on pay.

If you reduce your salary to a small (but not unreasonable) amount and withdraw extra money form the company in dividends, is a legal and perfectly reasonable way of saving on your taxes. However I do not know if this strategy would provide any benefit in the US tax system. I guess it depends on the state you live in.

devmonk• 16 years ago

From what I've been told, only plan on creating an LLC if you:

1. Want to be able to write a bunch of stuff off as company expense.

2. Don't mind the paperwork.

For liability you need insurance, not protection from an LLC or C-Corp, neither of which will necessarily protect your assets if you are working on your own.

The advantage of a C-Corp primarily is to get business from companies interested in corp-to-corp. If you look on Dice, etc. there are a number of jobs listed as corp-to-corp only. I read that this partially stems from a court decision where contractor employees were able to sue for benefits that weren't even W2, but that if you are under a C-Corp they wouldn't have to worry about that.

BTBurke• 16 years ago

You can't write anything off unless you have income from that company coming in to offset against.

jrussbowman• 16 years ago

Thanks for all the replies. I think the consensus is that I'm on track. It's actually cheaper to register an LLC in Deleware than it is in my home state of VA, so I'll look at that.

I am aware that I will have to keep all the paperwork, hold an annual meeting (even if it is with myself) and everything else to make sure it's established as an entity.

Besides personal liability, finances are another issue. The main thing I want to do though is when I sign up for services like ad.ly, bing advertising and even Google adsense, all the money goes into an account other than my personal one. That way I can also track how much money I'm really bringing in. Using it for personal consulting would be very helpful as well. This also means I can transfer my domains to that entity as well. The separation of finances is something that I think will be very helpful. I'm currently on a 3 year plan I created to get rid of a lot of my own debt, so separating business finances will be helpful. Also, at this stage I'd like to make sure everything the projects make go back into project so that hopefully one of them does turn out to be a profitable venture.

roblund• 16 years ago

One thing I would note, if you plan to open a business checking account most banks will want to see the tax id number for your business.

Ask HN: Question about forming a company for side projects.

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