Foo - Thinking about starting a business.

A friend and I are currently discussing an idea and we like to start off by forming an LLC. It appears as though Nevada is the place to do it as it has no state business tax and the headquarters can be anywhere. Is this really the case? If it is, why aren't all companies Nevada companies? Are there drawbacks to doing this?

Whhore house?

A friend and I are currently discussing an idea and we like to start off by forming an LLC. It appears as though Nevada is the place to do it as it has no state business tax and the headquarters can be anywhere. Is this really the case? If it is, why aren't all companies Nevada companies? Are there drawbacks to doing this?

Taxes are based on the location of the business, not what state it is incorporated in. You may save $ with incorporating in Nevada, not sure about that. Delaware is another popular state for incorporating in.

Also keep in mind that Incorporating and forming an LLC are NOT the same thing.

A friend and I are currently discussing an idea and we like to start off by forming an LLC. It appears as though Nevada is the place to do it as it has no state business tax and the headquarters can be anywhere. Is this really the case? If it is, why aren't all companies Nevada companies? Are there drawbacks to doing this?

Nevada Corporations are really only beneficial if you have a lot of assets, like owning the building your business is operated in. The Nevada Co can "own" it, then lease it to your in-state corporation where you can write it off.

I recommend making LED lamps in your basement.

If I need to purchase a product for $200 to test my product, I've heard I can write it off. Can I? What does that actually mean? If I'm still in the developing stage, I haven't sold anything, I have no income, but I'm spending on things that will get me there. So how does "writing it off" actually work?

http://ecx.images-amazon.com/images/I/51zcvbjZZsL.jpg

"writing it off" is only good for you if 1. you have an income to be taxed. and 2. your total deductions will exceed the standard deduction that you already get when doing taxes.

I did not start "writing stuff off" until I bought a house and had all that interest to write off... then all the $200-$300 deductions, that in the past never would have added up to more than the $3-4K standard deduction, became more important.

OBTW the goofiest, laziest, most bass ackward goofball in my graduating class started a small business right out of college... it was called Volcom... it did OK.

Hey - ya never know. Guy who started ebaumsworld is from Rochester - started the company @10 yrs ago - and he was young. And sold it last year I think, for $17million. Where the company is located - one of the plans last year (as reported in local paper) was they were going to basically buy the whole block where the headquarters is (it's in a local town).

My understanding is once you start the "business" you basically need to generate a net income, and if you don't within the first year or two, the IRS declares it a hobby, and any gross income you made is still taxable income, and any expenses you declared are disallowed as being spent on your hobby.

A friend and I are currently discussing an idea and we like to start off by forming an LLC. It appears as though Nevada is the place to do it as it has no state business tax and the headquarters can be anywhere. Is this really the case? If it is, why aren't all companies Nevada companies? Are there drawbacks to doing this?

Plus I'm pretty sure (I'm confident someone will correct me if I'm wrong) that you have to have some sort of presence there. At the very least a PO box to have mail sent to that you'll have to go there from time to to time to pick up (or know someone there to grab it and forward it to you).

These guys are very popular for setting these sorts of things up. Good FAQs and an easy on line interface for setting up a corporation.

https://www.incspot.com/cscglobal/index.jsp

My understanding is once you start the "business" you basically need to generate a net income, and if you don't within the first year or two, the IRS declares it a hobby, and any gross income you made is still taxable income, and any expenses you declared are disallowed as being spent on your hobby.

That's actually a myth. The IRS examines and evaluates these things on a case by case basis. There are plenty of companies that sustain losses for years on end, but if the business is operated with a profit motive in mind (even if it's unsuccessful in it's attempts), it's likely to have legitimacy in the IRS's eyes. Some things that would cause the IRS to classify it as a hobby - poor recordkeeping, comingling of funds (personal and business, even if it's a sole proprietorship), lack of documentation to prove the owner made an effort to make a profit. Be aware that in most IRS disputes with a taxpayer, the taxpayer has the burden of proof.

There is only one reason to form a Delaware or Nevada corporation - to shield the owners of liability. When corporations are accused of wrongdoing, plaintiffs will often try to "pierce the corporate shield", which means that they bypass the corp. entity and go after the personal assets of the shareholders (owners) and/or officers. Delaware and Nevada have made it extremely difficult to do this (through years of case law), making it quite attractive to incorporate in those states from the shareholder's perspective. If the corporate shield works as it's supposed to, shareholders are only liable up to the amount they invested in the company.

Sole proprietorships offer no liability protection of personal assets. It's also nearly impossible to have a liability shield if you operate a "personal service corporation" or an LLC where you and you alone are responsible for providing services and making decisions for your clients.

My understanding is once you start the "business" you basically need to generate a net income, and if you don't within the first year or two, the IRS declares it a hobby, and any gross income you made is still taxable income, and any expenses you declared are disallowed as being spent on your hobby.Not really, I just talked with my tax attourney about this. The IRS typically considers a 2nd business a "hobby" business to wash through expenses. They would scrutinize the tax-filings of this 2nd business very carefully to see if you're trying to hide things.

My understanding is once you start the "business" you basically need to generate a net income, and if you don't within the first year or two, the IRS declares it a hobby, and any gross income you made is still taxable income, and any expenses you declared are disallowed as being spent on your hobby.

Let me clarify, because you're almost right.

If you don't turn a net profit within 3 years, the IRS may (or may not) examine your business to make sure you're not engaged in a hobby activity and attempting to disguise it as a business.

If you can demonstrate profit motive (i.e. you advertise, have clients, have made sales, etc) or demonstrate legitimacy (obtain a legitimate business entity/license, register your entity with the department of state in your state, and so on), they will almost never declare you a hobby business. It is often the case that a new business will not turn a profit for some time, sometimes years if growth is a factor.

I had this exact same conversation with my accountant a couple of years ago when starting my business.

Not really, I just talked with my tax attourney about this. The IRS typically considers a 2nd business a "hobby" business to wash through expenses. They would scrutinize the tax-filings of this 2nd business very carefully to see if you're trying to hide things.

It is extremely common for people to have multiple businesses. For example, a real estate investor typically creates an LLC or INC for each individual property, so that claims arising from the operation of one cannot go after the assets of another. The IRS doesn't even give this a second look.

The key is to demonstrate profit motive and legitimacy. It doesn't matter what happens as long as you do that. If you get audited, and show them receipts for legitimate business expenses, you won't be disallowed anything.

One other thing that helps immensely is to keep a notebook of your business activities. Log your daily activities, purchases, trips, phone calls, and so on. Keep your emails beyond the IRS audit retention period. The more you can demonstrate legitimacy and profit motive, the easier time you will have if the IRS comes calling, which is very unlikely if you really are legitimate.

Sole proprietorships offer no liability protection of personal assets. It's also nearly impossible to have a liability shield if you operate a "personal service corporation" or an LLC where you and you alone are responsible for providing services and making decisions for your clients.

I might argue against your point on LLCs. While it is easier in some states than in others to pierce the corporate veil, each state outlines what you must do to maintain it. Usually, if you have completely separate financial records, do not commingle personal and business funds/possessions, have a separate place to do business (or a well-demarcated place in your home that is set aside as business-only), and do not create the appearance in any respect that your business and you are inseparable, then you'll be okay.

Again, it varies from State to State, but if you follow the rules, you'll likely be able to maintain the corporate veil.

Of course, the best thing to do is hire an attorney competent in your jurisdiction.

Plus I'm pretty sure (I'm confident someone will correct me if I'm wrong) that you have to have some sort of presence there. At the very least a PO box to have mail sent to that you'll have to go there from time to to time to pick up (or know someone there to grab it and forward it to you).

These guys are very popular for setting these sorts of things up. Good FAQs and an easy on line interface for setting up a corporation.

https://www.incspot.com/cscglobal/index.jsp

What you're talking about is probably the Registered Agent. You need someone within the state to act on your behalf and represent your entity to the Department of State (or whatever government entity regulates the formation of businesses).

If you incorporate in your own State, you can be your own Registered Agent. If not, you need to use a Registered Agent Service, at a cost of about $200/year. They will receive all notifications from the State on your behalf, notify you if there is anything you need to do, and file paperwork for you.

"Whatever you can do, or dream you can, begin it. Boldness has genius, power and magic in it. Begin it now."--Johann Wolfgang Von Goethe.

www.legalzoom.com

I might argue against your point on LLCs. While it is easier in some states than in others to pierce the corporate veil, each state outlines what you must do to maintain it. Usually, if you have completely separate financial records, do not commingle personal and business funds/possessions, have a separate place to do business (or a well-demarcated place in your home that is set aside as business-only), and do not create the appearance in any respect that your business and you are inseparable, then you'll be okay.

Again, it varies from State to State, but if you follow the rules, you'll likely be able to maintain the corporate veil.

Of course, the best thing to do is hire an attorney competent in your jurisdiction.

Let me clarify - I was speaking of LLCs where there is only one member and one person (the owner/member) providing a service (as opposed to a retailer or manufacturer). The type of business I that would fit under this category - consultants, chiropracters, accountants, or attorneys, where there is only one member and none of the other employees (if there are any) make material business decisions. When these types of LLCs cause some sort of direct injury (financial or otherwise), it's nearly impossible for the member to say "Well, I'm not responsible for this" and walk away from the LLC as if they weren't somehow personally liable.

But I agree with your point - the "veil" of an LLC is tough to pierce if one treats it like a separate business as opposed to an extension of themself.

"writing it off" is only good for you if 1. you have an income to be taxed. and 2. your total deductions will exceed the standard deduction that you already get when doing taxes.

I did not start "writing stuff off" until I bought a house and had all that interest to write off... then all the $200-$300 deductions, that in the past never would have added up to more than the $3-4K standard deduction, became more important.

OBTW the goofiest, laziest, most bass ackward goofball in my graduating class started a small business right out of college... it was called Volcom... it did OK.

Your talking apples and oranges.

you are talking about personal write offs and he is talking about business writeoffs

Let me clarify - I was speaking of LLCs where there is only one member and one person (the owner/member) providing a service (as opposed to a retailer or manufacturer). The type of business I that would fit under this category - consultants, chiropracters, accountants, or attorneys, where there is only one member and none of the other employees (if there are any) make material business decisions. When these types of LLCs cause some sort of direct injury (financial or otherwise), it's nearly impossible for the member to say "Well, I'm not responsible for this" and walk away from the LLC as if they weren't somehow personally liable.

But I agree with your point - the "veil" of an LLC is tough to pierce if one treats it like a separate business as opposed to an extension of themself.

I understand the distinction, but at the same time, there are rules for maintaining the corporate veil, and they apply to all LLCs, regardless of the business function or number of members. The corporate veil is a legal concept and it is either met or it is not. My LLC is services-based. I perform technology and engineering services for my clients. I am the only person legally tied to the LLC. That does not mean I cannot maintain and defend my corporate veil in court, and the fact that I am a "single-owner LLC" does not make my corporate veil more penetrable than any other hypothetical LLC.

I can see where it would be easier for the sole Member of an LLC to mess up on the rules and do something to put a ***** in the armor, but as long as you're meticulous about paperwork and following the rules that are laid out, there is no legal way to pierce the corporate veil, no matter how many members exist in the LLC.

Of course, this all leads to another very important point that nobody has brought up yet. That is, insurance. At the end of the day, the one thing that you absolutely cannot do business without is liability insurance. For the obvious reasons you stated, no matter how meticulous you were in maintaining paperwork, the plaintiff's lawyer may still successfully pierce your veil (regardless of how many members the LLC has). If that happens, you best have a personal umbrella policy in addition to your LLC's liability insurance. Personal umbrella policies are pretty cheap - about $150/yr per $1M in coverage - and will definitely make you sleep better during the nights after you receive the plaintiff's notification of intent to sue.

I can see where it would be easier for the sole Member of an LLC to mess up on the rules and do something to put a ***** in the armor, but as long as you're meticulous about paperwork and following the rules that are laid out, there is no legal way to pierce the corporate veil, no matter how many members exist in the LLC.

This is from Nolo.com (http://www.nolo.com/article.cfm/objectID/D7043E4E-91CB-4B29-B8DC0DDA10AD4B3B/111/182/245/ART/)

"Exceptions to Limited Liability
While LLC owners enjoy limited personal liability for many of their business transactions, this protection is not absolute. This drawback is not unique to LLCs, however -- the same exceptions apply to corporations. An LLC owner can be held personally liable if he or she:

personally and directly injures someone ...

intentionally does something fraudulent, illegal, or reckless that causes harm to the company or to someone else..."

I'm a one-person LLC myself (CPA practice). My attorney warned me because he represented a CPA (one person LLC) who did everything by the book so far as LLC compliance is concerned, but when sued for malpractice, the CPA didn't have enough assets in the LLC to cover the judgement, so he had to sell his house to make up the difference. Scary stuff. But the attorney did admit that the CPA did give bad advice - bad enough to be considered negligent.

Completely unrelated: isn't if funny the word that was censored in your response? I'm thinking the word you used is the same as a derogatory term for someone of Chinese descent - am I right?:lol:

Now is probably the worst time to start a business.

This is from Nolo.com (http://www.nolo.com/article.cfm/objectID/D7043E4E-91CB-4B29-B8DC0DDA10AD4B3B/111/182/245/ART/)

"Exceptions to Limited Liability"
....

Completely unrelated: isn't if funny the word that was censored in your response? I'm thinking the word you used is the same as a derogatory term for someone of Chinese descent - am I right?:lol:

Those exceptions exist no matter who you are or what your legal entity's status is. It doesn't matter if you are a single-owner LLC or one of 100 members. If you personally and directly injure someone, you are personally liable. If you perform a service for someone that causes a loss incidental to that service, then you are NOT personally liable, but you _are_ professionally liable.

For example, if I am at a job site and I perform an unsafe action and injure someone else, then I am personally liable for that tort. If I design a device that uses 120V mains and does not have a fuse, and it catches fire, my LLC may be liable for that fire under product liability, but I personally am not. That might be professional misconduct or negligence, but it is not a tort. At least, this is how it was explained to me.

In any case, rules of personal liability always apply for things you do with intent or out of personal negligence. But, making a professional mistake in your advice does not cross that line.

And yes, the word that was censored was what you suspect it was. :)

Now is probably the worst time to start a business.

Incorrect. The 'recession' will be over very soon, and the recovery will commence. Good time to start a business, you'll be coming up OUT of the downturn INTO the upturn. This recession has already been going on for 13 months. If it lasts another year it will be the longest recession since 1933. So the turnaround will come soon (technically), but this will be the year most businesses and individuals suffer the most pain.

^^ I hear that... apparently the first thing people do in a recession is stop buying t-shirts. Hah.

My business has fallen dramatically this year, mainly due to cutbacks in R&D and capital spending. Thank God my business is only part time to my Real Job.

We had a great year in 2008, then in September business sailed off a cliff. 2009/2010 will be very tough indeed.