Registering a business - My 4 hour work week Muse

[ermballa]

Hey all-

Thanks for reading this, and I could really use your help. I have created a product in the workout industry and just got done with the testing mode. I got quite a bit of interest and now am going to move forward but need advice as to what type of business to register & how to go about doing this. I understand their are positives and negatives to each model, but b/c most of my decision making has come from this book, I figured you all might be able to help me out.
Here are the facts: 1. I'm in my 20's and have very little money (and personal assets). Am single, so I don't need to worry about wife/kids getting in financial trouble.
2. My product is in the workout industry, so b/c of the possibility of people getting hurt from using my product, getting sued has to be in my thought process.
3. As of right now, I'm battling between a sole prop & a s-corporation. Obviously the sole prop is easiest/cheapest but don't want to screw myself down the line. The S-corp is more expensive & b/c I live in California there is an $800 tax each year. I've thought about registering in Nevada, but have heard this could screw me later on as well.
4. My product is going to be sold mostly online.
5. As far as registering it goes, has anyone used Legal Zoom or a similar website. Once again, trying to save some money.

Any advice would be greatly appreciated.

Thanks

[seth121]

If you go sole proprietorship you can still get sued as well as having an S-corp. In a sole proprietorship it still requires you to register your legal name and anywhere your legal name is used they can easily find your assets. Even when you register a S-corp or C-corp you are still using your legal name. Now many will tell you that if you form this corp and that corp then you will eliminate risk of being sued and they can only target the company. Not necessarily. Anywhere your name is attached you will become liable. Even if you apply for business credit or loans for your business it will be under your personal name. Very very very rarely will they take anything under a business name as the whole owner.

The only way around this is an expensive corporate lawyer to set up a LLC, s-corp, or c-corp properly so you will be somewhat "detached" from all the business operations. But corporate lawyers are expensive and unless you have a great product, quite a bit of cash stashed like pablo escobar, and time then this would be the best way to go.

If you look around at registered businesses you can see the ones who separated there personal names from there business completely. Another thing is if you are able to find a lawyer who does it for cheap and assures you it would be easy or that just make your LLC or c-corp and do all your business under that and you are fine, I would be very cautious. Separating your name completely out of something is not that easily done. Sometimes even transferring title over to a business can be a mess.

But if you would like to just get started you can do a LLC. S-corps and C-corps are used when you are generating at least $500,000-$1,000,000 a year because their tax structure is geared better towards those income levels than the others especially when you work out dividend payouts etc. S-corps and C-corps allow you to be really crafty with income and taxes but may become a little too complicated for a small business. But you can always switch from a LLC to a S-corp or C-corp at anytime. You just file some paper work and wait.

So just do the LLC for now check out what you can earn, get a good liability insurance either for the product or you or your business and test the waters. LLC + insurance = easy and fast and can eliminate the cost risk of being sued.

[kamakiri]

Incorporated or not, if you have assets and cause damage, you will be sued. Corporations do not offer that kind of protection. Not at all. Look at Worldcom. Do you think Bernie Ebbers ran it as a sole prop?

Quit trying to complicate things or you will shoot yourself in the foot. thinking about getting sued should be at the bottom of your priority check list. If your product gets people hurt, then throw it away and start again. Very easy. If there isn't a possibility, then buy liability insurance and be done with the thought. That is what it is for. There is no such thing as negligence insurance though.

Getting sued for 100% of nothing is ... let me calculate that ... NOTHING!

If you must complicate things with a company, anything like 'Legal Zoom' is probably a scam. I didn't even bother googling it. Setting up a company is almost entirely free. Go to your local bank (go to 5 banks actually and get a free business account education) and the business banker will set you up with all of the information you will ever need.

[AlexMoen]

I'm a native Californian, and I found out that if you incorporate in another state you're still supposed to pay CA the $800 or so dollars per year. It's a rip-off, I know, but those are the rules, and incorporating in another state is just adding to the mess of taxes. It's not worth it if you're just starting out.

When you just start out don't worry about it and just do the sole proprietorship. Like Kamakiri said, if you get sued, the worst case scenario is that you lose what little you have. In my opinion, don't bother blowing your money so that you can minimize losses in the event that you get sued for everything. $800 of advertising or testing can be invaluable to a new company. Start out as a sole proprietorship, and then once your business model is proven to be effective and you actually grow, then incorporate (and LLC is my business option of choice- I don't know why you'd want an s-corp).

If you do decide to still go with forming a business entity other than sole-proprietorship (which requires nothing- every business that runs is assumed to be this until signed up as otherwise), do the paperwork yourself. When I started my LLCs they were fairly easy to do on my own, and the total cost wasn't that much. I found that what lawyers were quoting me to incorporate was actually a pretty huge amount considering how easy it was.

If you want to get around CA's $800 fee, the only way to do so (from what I've found. And legally) is to have a business partner and incorporate in their state. You'll still have to pay your personal taxes for CA, but it seems you can get around the other stuff.

But, these are just from my experiences- do your own research and don't follow me blindly or attempt to sue me if something goes wrong ;o)

[kprimo25]

Ermballa,

You've raised a couple of different issues. I tried to answer most of these in my product, but I'll try to help. First, anyone can sue you personally. The issue is, will there be personal liability? Owners of California businesses such as LLC's, S Corp's, C Corps, etc. aren't liable to creditors solely by virtue of being a shareholder. In order to trigger personal liability, one of two things has to happen. (1) You're personally involved in the conduct which got your company sued. In other words, you defrauded an investor to buy shares in your company, you are personally liable. Or (2) you're using the company as an alter ego, in which case the courts pierce the corporate shield.

The main liability you sound like you're concerned with is products liability, i.e., someone sues because they're injured using your product. Talk with a business insurance broker. Depending on your sales, you should be able to get a reasonably priced commercial general liability policy. Make sure you understand what your buying, and if the general policy form doesn't cover what you're worried about, ask your agent about appropriate riders (e.g., an advertising rider to cover you in the event you're sued for trademark infringement, unfair competition, etc).

Finally, you pay an $800 franchise tax for the privilege of doing business in California. I address the idea of out of state formation in great detail in one of the chapters of my video, but the bottom line is that it's rarely worth it. You'll still pay taxes on your income when you distribute the corporate earnings to yourself, and Nevada and other states which have favorable tax schemes are talking about greatly increasing the cost to set up your business in their states (last I heard, Nevada was thinking about a $2k franchise tax).

I hope this helped. Best of luck in your business.

[phil]

Originally Posted by AlexMoen

if you incorporate in another state you're still supposed to pay CA the $800 or so dollars per year. It's a rip-off, I know, but those are the rules, and incorporating in another state is just adding to the mess of taxes. It's not worth it if you're just starting out.

When you just start out don't worry about it and just do the sole proprietorship.

I agree 100% with AlexMoen. Just do it sole prop. Then, when you have say, $100k in sales (and are profitable too), do the LLC.



$800 LLC fee

Then, there's a gross receipts tax, based on your total sales.
More than $250k: you pay $900
More than $500k: you pay $2,500
More than $1M: you pay $6,000
More than $5M: you pay $11,790

[ermballa]

Thanks for all of the suggestions guys. I'm filling out my paperwork to be a sole prop and will be submitting it over the next day or two. On that note, there is potential for 1 or 2 spin off items - it would be in the same industry but fill a different niche. I would want to keep them as separate websites, but can I still operate them under 1 sole prop license?

A comparitive example would be if my company was selling unique college sports apparrel. Because it was doing so well, I would start a new website w/ the same products but for pro-sports teams. (for the sake of the argument, let's assume it makes more sense for 2 websites as opposed to adding onto the first website).

Thanks again everyone, I really appreciate it & I'll let you know when the site is/are up and running!

[seth121]

A sole proprietorship functions as a single individual entity so it shouldn't make a big difference whether you have 2 separate websites.

[JasonJoseph]

This thread has helped me.
Thanks!

[ermballa]

Thanks for your help everyone....registered my sole prop and am waiting to get my official license...will let you know when the muse is done and ready for critiquing!