Simple Mystery » Incorporation

Nuts and Bolts

jane — Thu, 12 Mar 2009 19:17:00 +0000

Ok, gang, it’s official: I are a corporation.

Setting up a corporation for yourself sounds fraught with complication, in the I-don’t-even-want-to-deal-with-it-let’s-just-forget-this-whole-thing kind of way. But once I started looking into it, it was really remarkably easy.

Step One: I searched for, and found, a good URL.

This is harder than it sounds. Every single word in the English language is already taken, and a lot of combinations, too. And you must, must, must have a domain that ends in .com. No good if your domeain is .net, .biz, or .mobi. (.mobi?) No one will ever remember it.

One good way to find a URL is to use a resource a friend turned me onto: Bustaname.com. You can put in a big ol’ list of words, and it will tell you which combos are available. I myself landed on SimpleMystery.com.

Cost: $10

Step Two: I reserved a name with the Georgia Secretary of State.

Georgia lets you do this with an online form. They make you add Inc., Incorporated, LLC, or some such suffix, so I am officially Simple Mystery, Inc.

Cost: $25.

Step Three: I filed the corporation.

Another online form let me do this in about fifteen minutes. They didn’t want anything special, just the company’s address, my name, and the names of the company’s CEO, CFO, and secretary (hint: they all start with a J).

I also had to declare the number of shares the company was authorized to issue. Mark said 10 million was a typical number, so that’s what I put down. Georgia doesn’t keep records of who the shares belong to; only the corporation does. So at some point I will need to just type up a letter issuing the shares to myself and stick it in the file.

Cost: $100

Step Four: I filed my annual registration.

Just another form saying yes, the company I just incorporated still exists, and yes, it is still in the same location. I will have to file this form once a year between January and March.

Cost: $30

Step Five: I published my intent to incorporate.

I live in Dekalb county, which means my legal organ is the Champion Newspaper. I paid them to publish the company’s name, address, and registered agent (me) once a day for two weeks.

Cost: $40

Step Six: I applied for an EIN from the IRS.

An EIN, or Employer Identification Number, is necessary in order to file the corporation’s federal taxes. Plus do other neat stuff like hire employees and get bank accounts. Once again, this was made easy with an online form, although said form is only available during certain times. Strange. But we are dealing with the federal government now.

Like the others, this form took just about fifteen minutes to fill out. The only minor hiccup was that it would accept no special characters in the name of the business, which means that Georgia thinks I’m operating as “Simple Mystery, Inc.” and the IRS thinks I’m operating as “Simple Mystery Inc”. This doesn’t seem like the sort of thing that could possibly cause any confusion, but as I said, we are dealing with the feds. So, I am moderately concerned.

Cost: Free

Step Seven: I elected to have my company taxed as an S Corp.

I did this by filing IRS form 2553 and shipping it off the the good people at the Internal Revenue Service. Of all the forms, this was the most confusing, but only mildly so. It just wasn’t entirely clear whether I was supposed to choose the calendar year as my tax year, or a fiscal year beginning on the date of my incorporation. I chose the calendar year because it seemed simpler.

This form needed to be filed within two months and fifteen days of the day I incorporated. Oddly enough, the long deadline makes it the easiest step to forget; most of the Georgia stuff needed to happen in one fell swoop.

Cost: Free

Total Cost of Incorporation: $205

So there, in a nutshell, you have the beginnings of my journey into the wonderful world of incorporated business. It was fairly easy, and reasonably cheap. I’ve got no guarantee of making that money back through tax incentives, but it’s possible. And either way, owning my own company is a thrilling feeling. It’s like I’m a grown up or something.

C Corps and S Corps and LLCs, oh my!

jane — Mon, 19 Jan 2009 23:31:00 +0000

Yesterday I blogged about my decision to form a company and some of the benefits involved. Now it’s time for me to look at what type of company to form.

For advice on this I looked to the Small Business Kit for Dummies.

It went over the basics, but just the basics. To really find out anything of interest, I had to crawl deep into the web.

First Up: Sole Proprietorships

This is the easiest type of business to form. Basically, you just file a DBA, a document stating that “Jane Kalmes is Doing Business As (Company Name).” And that’s it. Filing your taxes as a sole proprietor is easy, which may mean savings in the form of low (or no) CPA bills.

The trouble is, most of the benefits sole proprietorships offer don’t apply to me. Sole proprietors can hire their kids without paying payroll taxes–but I don’t have any to hire. They can also cover their spouse with an HRA, a Healthcare Reimbursement Arrangement, provided their spouse is an employee and this benefit is also extended to any other employees. This can be a significant benefit, because it means they can deduct legitimate healthcare expenses twice: once from income taxes, and once from self employment taxes. But I don’t plan to employ Mark, and we get our healthcare coverage through him anyway.

So it looks like a sole proprietorship isn’t for me. Onward, then.

Next up: C corporations

These get the most tax breaks, but they’re not a great choice for a small businessman because their income gets taxed twice: once at the corporate level, and once after the profits have passed through to the shareholders. Unless you can hold a lot of income in your corporation (and I won’t pretend I’m savvy enough to even know how to begin), a C corporation is not the right vehicle for you.

Then we have: S Corporations

Now we’re talking. S Corporations use pass through taxation, meaning that the shareholders are taxed on the income they receive, but the revenue isn’t also taxed at the corporate level. Sounds more promising. S Corporations are still very complicated to form, though. There’s a lot of paperwork involved. Maybe I should hunt around for something simpler?

Last Up: LLCs

Limited Liability Companies, or LLCs, are the easiest company to form that affords limited liability. They’re flexible. They don’t require meeting minutes and stock certificates the way corporations do, and they have pass-through taxation. Sounds like a winner.

Here’s The Rub…

S Corps have one huge advantage over LLCs, though. The owner of an LLC has to declare all the company’s revenue as income, which means that she pays self-employment taxes on it. Self-employment taxes combine Social Security and Medicare. You’ll pay more for Social Security than you would if you were employed, but you won’t have to pay FICA, so it comes up about the same: 15.4%.

In contrast, the owner of an S Corp can pay herself a “reasonable salary,” and pay self-employment taxes on only that salary. Then she can allow the rest of the corporation’s revenue to pass through to her as stock dividends, thus avoiding the 15.4% tax. The salary really does have to be reasonable, though; if the IRS suspects that your $1 salary doesn’t meet industry standards, they’ll reclassify your distributions as salary, tax them, and then penalize you for making them go to the trouble.

So, in a nutshell, this is how a corporation saves you money. If you’re making more than a reasonable salary for your industry, you can save 15.4% of that excess.

Sounds good to me. S Corp, here I come!

To Be or Not To Be… A Legal Entity

jane — Mon, 19 Jan 2009 22:51:00 +0000

The book’s nearly out the door, which means there are visions of agents and editors dancing in my head. And dollar signs. Big dollar signs.

So I’ve been doing a lot of research into the question of whether or not to incorporate my writing business. I still haven’t made up my mind yet, because it’s a complicated question, peppered with lots of incomprehensible little phrases like “2.7% SUTA on first $8500, until adjusted.”

Basically, it boils down to this: if I make a lot of money (and, hey, I plan to, right?), forming a corporation can help me bring home more of that bacon. If I don’t (and most writers don’t), the initial investment in filing fees and assorted minutiae will be essentially wasted.

So, take the plunge or stay on dry land? Still waffling, but here are some of the issues at hand:

Limited Liability

This is one of the major reasons most people form corporations, to protect their personal assets from any lawsuit against their business.

Sadly, for a writer of fiction, this limited liability is largely illusory. It wouldn’t protect me from being sued for my own wrongful acts, which means if someone came after me with a plagiarism suit (and I hope it goes without saying that such a suit would be pure nonsense), the corporation wouldn’t help. They could attack me, and my personal assets, directly.

It would make sense, though, if I were going to be writing a lot of technical manuals for companies whose legal squeaky cleanness I didn’t want to be responsible for. Or if I planned to hire lots of employees, such as a secretaries or research assistants. My limited liability would prevent me from being personally sued for any of their wrongdoings while working under the umbrella of my corporation.

Tax Savings

This is the real meat of the question: will I get taxed more or less if I incorporate?

The short answer is, it depends. There are several types of companies I can form, and they each have their own pluses and minuses with regards to the tax code. How much I can save (or, if I bungle things up, lose) is largely dependent on whether I choose to form a C Corporation, an S Corporation, or an LLC, all of which I’ll explain in more detail in my next post.

It’s also dependent on how much I make. For a writer, this is a pretty hard number to figure in advance, but it’ll have deep implications on my bottom line. If I’m not going to make a significant income, I’ll be better off not incorporating. (I’m thinking the threshold might be as low as $40K, though some articles I’ve seen online put it much higher.)

Odds and Ends

How much are filing fees? Do I have to carry worker’s compensation insurance? What weird little addenda in the tax code apply to me?

This is the place where the question of whether or not to incorporate begins to get rather sticky and burdensome. Where it seems like it’d be easier to just throw up my hands and take a tax hit if that’s what I have to do. This is a hard part to push through, which leads into our next area of interest:

Effort

It’s work, a lot of work, getting all this information together and acting on it. Worse, if I screw up some little detail there may be serious legal or financial penalties. Still sound like a fun challenge?

The bright side, in a weird way, is that some of this work is unavoidable. A self-employed person is going to have to dig into the tax code and file quarterly returns anyway. So I might as well just go the extra mile and incorporate if it’s going to save me some cash.

And those, in a nutshell, are the issues I’ve been wrestling with over the past weekend. It’s daunting, but a little fun, too, and a welcome break from worrying whether my book will ever be the masterpiece I envisioned before the whole mess was down on paper. Tomorrow I’ll discuss types of companies, and tell you which one I’ve decided (tentatively) to form.