Forums: Discussions for entrepreneurs and small business.

Hello Everyone,

This is my first post on this forum so please be gentle.

I have just started an online media company. Currently I have no  official legal or tax structure which is bad because I`m getting ready to sign contracts for my first project. (Stupid me!)

Over lunch, a mentor of mine recently verbally assaulted me on my own behalf for not paying more attention to how I will structure my company and cover my culo legally in the sometimes, legally icky world of media.

So here is my question (Finally!)

I`m from California and a California resident. I will be running my LLC in Santa Cruz County, CA. (Are you surprised? )

My friend says I would be stupid not to create my LLC through a website called www.mycorporation.com and register the LLC in the state of Deleware. Delware taxes for LLCs, he claims, are far less than in California. Sitting across the table from him, trying to avoid his stern, semi maniacal gaze, my head, already swirling, started swirling on overdrive.  "Everybody incorporates in Delaware" he declared resolutely, pounding his fist on the table, a string of half melted cheese from his bean and cheese burrito hanging from his beard.

Visions of myself buried under tax forms began filling my head. I began to fret about the added layer of Delaware induced complexity which I would willfully be piling on to myself.

What do you experienced entrepreneurs, legal and tax experts think about this?

Am I better off registering the Llc in Deleware or in California? I`m sorry I just don`t know where to begin on this one. The only reason I`m even considering Delaware, is that (if it is legal), I could significantly reduce my tax burden by registering my Llc in Delaware and paying Delaware, rather than California taxes.

Best,

Quickfoot2

Quickfoot2,
If youre in the State of CA, like myself... do it in CA... Although, theres alot of perks incorporating in Delaware, things get complicated when you do that.... If you Incorporate in Delaware and do business in CA, you have to register your Corporation with the Secretary of State here in CA, and have to pay the yearly fees of $800.00 to Cali, and the $250 to Delaware... so you`re already $1050 just to file in Delaware..
The list goes on for ever..email me if you want more details



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Edgar Monroy
Web Developer / Owner / Consultant
When starting your own business the need to "know-how" is greater than money!
http://www.nuevolution.net

I agree with Nuevolution.  You are adding a lot of unneeded fees and complexities to your business in establishing your business in a different state than where you do business. 

Generally it`s best to simply form your LLC in your own state (now whether or not you should actually even be forming an LLC is another question).

Yes, for LLCs CA has a minimum tax of $800 annually. They call this a "franchise tax," but it`s really just an income tax for your business. If you`re going to be earning a substantial income from your business, the $800 minimum might not even matter much.

One final thought: I`d stay away from mycorporation.com. I used them once for another business. AWFUL service. I truly cannot say enough negative things about my experience with them. I`d suggest looking elsewhere.

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Accounting Made Simple | Sole Proprietor Tax Guide

Quickfoot,
I want to add more to this...The reason why most people incorporate in Delaware or Nevada is because of the Low tax (franchise tax) that you`re charged yearly, the other benefit you have is that, when you register your corp in any of these two states, your personal information is not shared with the IRS or public records, which makes all board members private.. most people do it for privacy... But here is where you will run into problems... In order for you to be a Delaware Corporation, you have to do the following:
1. Have a business phone number in Delaware
2. An physical address in Delaware
3. Establish a Bank Account in Delware

Are you willing to travel out there just to go establish the three requirements? Now there`s a way around that, you can pay a Company to do all that for you... its called a "virtual office".

A virutal office runs about $1,500.00 a year, here is what they do for you.
They provide you with your own phone number, they give you a virtual office with mail box, and they open a bank account for you.
Ok, so now you`re Incorporated in Delaware, so what about your minutes? its not even worth it.
Here is another thing about California, the minute you register your business as a foreign Corp, all board members information has to be disclosed to the State, so where`s the benefit of being private in other states?
Honestly, save yourself and your tax people the trouble... If you`re in California, the $800.00 is not that bad...
Use the $1500.00 for marketing or inventory...
Now as for the comment about mycorporation.com, I can`t say bad things about them, I used www.corporate.com, the company corporation and I was treated with respect and good customer service..


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Edgar Monroy
Web Developer / Owner / Consultant
When starting your own business the need to "know-how" is greater than money!
http://www.nuevolution.net

Hi Nuevolution,

Thanks a lot for taking the time to write such detailed responses to my questions. I`m  a little confused however, as I thought an Llc was different from an S or C Corporation in that you don`t need to have a board of directors or regular meetings with minutes? (Could be wrong here). My understanding was that Llcs have "members" and in California they don`t need more than one "member."

Apart from starting my own business, I work for a subsidiary of a very very large corporation. Recently that very large corporation created an Llc in Delaware called "On-demand publishing." On-demand publishing`s offices are actually located in the state of Washington. The subsidiary that I work for is located in California and considered a dba of On-demand publishing.

I`m on very good terms with the accountants at the company that I work for. I tried to extract as much information as I could from them on how this whole thing worked, but they said all of the complicated accounting was handled up in Seattle. Damn! I don`t know any of the Seattle folks and they would just be annoyed if I asked them any questions.

I wrote a little bit more about the catch 22 that I`m facing as a penniless independent producer (woe is me) at this phase, here . . .

http://www.startupnation.com/forums/8988/1/1#PID79869

Hi Piper tax,

Thanks for writing. I`d like to ask you for some additional advice if I might, especially on . . .

"If you`re going to be earning a substantial income from your business, the $800 minimum might not even matter much."

$800 would represent a significant expense to me. To put this into perspective, this would represent 44% of my budget for my first project (which I am engaged in producing now). I`ve started a new thread to ask for advice on dealing with this problem. It can be viewed below.

Thanks for your reply,

Quickfoot2

An Indie Producer`s Catch 22 (Operating on a shoestring)

Hmm, well then the LLC in CA might not be such a great idea.

If you`re only going to be working very part-time on this venture, perhaps simply staying a sole proprietorship is the way to go. (To put this in perspective, that`s my advice for about half of clients I work with: Stay a sole proprietorship. For another 30% or so, it`s LLC. S-Corp for about 15%, and C-Corp for hardly anybody.)

In all likelihood, if you`re not going to be taking on many projects, you could probably find an insurance policy with a very low premium (ie, significantly less than $800) that would take care of liability issues. That way, you`re a sole proprietor, so taxes are simple, and your liability side is taken care of.


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Accounting Made Simple | Sole Proprietor Tax Guide

Hello QuickFoot2!  I grew up in Santa Cruz County.  A small town called Felton to be exact.  I attended San Lorenzo Valley.

I have to agree with the advice you`ve received so far.  From what I`ve read, in my opinion, you should be a sole proprietor this year, get yourself a good umbrella policy and take it from there.

Without writing a dissertation, the reason it`s a "good deal" for your company to incorporate in Delaware is because they are located in Washington - a no tax state.  California is a tax them tell they die state, no wait, tax them until and after they are dead state.  Big difference.

If you need more help, let me know.

Best wishes,
Gina




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Gina L. Gwozdz, CPA
http://GLGcpa.com
http://TaxTreasures.com

Hi there!

I agree with Gina about starting as a sole proprietor in year one with an umbrella policy.  California has some pretty complex rules about incorporating in another state - they`ve closed off some "loopholes" and you really need to research this thoroughly before choosing a corporate entity.   You may end up paying a lot more in fees than necessary if you incorporate in another state but do business in California.

And if my memory is accurate, California has some pretty heavy income tax consequences if you file as an LLC (with partners) - more so than if your company is a C or S corp.  I consulted with an engineering company that switched from a California LLC to an S corp because their taxes as an LLC were astronomical.  If you are a single-member LLC and choose not to file as a corporation, the LLC gets reported on your Schedule C, just as if you were a sole-proprietor anyway.  I`m not sure how much extra help and protection you get from being a single member LLC. 

Anyway, my two cents worth is to get some professional advice from a tax accountant and/or tax lawyer if your business looks like it`s really taking off.