If you are a freelancer or are operating as an independent contractor, you already own your own Software Development Company. Cool, right? Accept it - whether you like it or not, you already own your own business. Congrats! Now, you just have to make it official. Why? Well, just because you haven't gone through the process of choosing an entity type and filing paperwork, doesn't mean the government hasn't selected one for you - a Sole-Proprietorship. If there is only one thing you take away from this article, let it be this: Sole-Proprietorships are bad. Really bad. Like, DEVO attempting a comeback bad.
You know the old adage "you aren't really in business until you've been sued"? Okay, so you've probably never heard of it. That's because it's usually what your friends use to console you after you've already been sued and by then, it's too late. Once that service processor shows up on your front door, anything you try to do to protect yourself (other than hiring one heck of a lawyer) will only land you in more hot water. So, take action now and protect yourself from the lawsuit-happy crazies out there that are angling to steal the fruits of your labor.
Luckily, legitimizing your company and protecting your assets (and even lowering your tax bill in the meantime!) is much easier than it looks...
First, decide on a business entity type. There are many different entity types but, chances are, there are only three that concern you: Limited-Liability Companies (LLC), Corporations and S-Corporations. So, let's take a moment to detail them and decide which may be right for you.
Forming an LLC is by far the easiest and most comprehensive step you can take to legitimize your software development company and protect your personal assets. LLCs are flexible - you can arrange the ownership and management however you like - and require very little maintenance and recordkeeping.
LLCs are generally taxed as partnerships (unless you arrange otherwise with the IRS), which means that the profits and losses (i.e., income and deductions) directly flow through to you (and your partners') personal tax returns. If you expect to contribute a lot of capital such as cash or tangible assets to your business this could end up making you pretty happy at tax time (a first, I'm sure!) because you'll be able to write these off as losses.
One of the other major benefits of LLCs is that they offer "charging order protection" which protects your business assets from personal lawsuits and creditors. This dual layer of protection is unique to LLCs and serves to insulate your business should you or one of your partners get sued personally.
If you are looking ahead to growth and expansion, or expect to raise capital through the sale of ownership in your company ("stock") then you may want to go the route of forming a corporation. Corporations generally have stricter recordkeeping requirements than an LLC, but stock can be transferred more freely.
Corporations are subject to corporate taxation and are taxed as completely separate entities. However, they require their own tax returns, separate from the owner, so it's important to keep separate accounting. In other words, you can't use your corporate bank account as your personal piggy bank.
For many centuries, Corporations have been the lifeblood of American commerce and, as an incentive for citizens to form corporations and transact business, the government gave corporations a much lower tax rate than individuals. Sounds great, right? Well, yeah...but all roses have thorns and should you choose to remove the profits from your company you could face a pretty hefty tax bill. This is because all corporate dividends (the distribution of profit) are subject to double-taxation. First, you get hit with the corporate tax and then they get you on an individual level with a capital gains tax. If you anticipate taking a lot of profits out of your company, this can become a financial deterrent.
An S-Corporation is simply a corporation formed as a regular corporation but electing a pass-through tax status with the IRS. Again, like the LLC, the profits and deductions get directly passed on to the owners' personal tax returns. There is, however, one major difference between LLC taxation and S-Corporation taxation - with an S-Corporation you are able to hire yourself as an employee and take profits out in the form of a salary, which will save you from having to pay a 15%+ unemployment tax.
S-Corporations also differ from LLCs in that contributions are not tax-free. So, if you are looking to invest a lot of startup capital or equipment into your business, keep in mind that these will not equal deductions at the end of the year.
Okay, so now you have the low-down and should be able to determine which entity type is best for you.
If things are still a bit fuzzy, then call our office at (888) 88-MYLLC (888-886-9552) or you can chat live with us and one of our brilliant (and I have to say, very good looking) formation specialists will help point you in the right direction.
Now, the formation begins... Forming your new entity is not nearly as difficult as you may think. Besides, I've tried learning programming (C+ C# = C me go completely crazy) and I assure you - if you can figure that out, this formation stuff will be a cinch. Only a few key steps, and you will be up and running in no time! So...
Ironically, deciding on a name is usually the most difficult part of the formation process. You can select your own name (followed by an "Inc" or an "LLC") but I suggest you flex your creative muscles and choose something that will allow for the growth and expansion of your business over time. You can request a free name search on MyLLC.com.
You may also want to do a federal and local trademark search to make sure that the name you want is available for use in your industry. You can hire an attorney to do this search for you, or you can save yourself some dough and just go to www.uspto.gov and search the trademarks for any conflicts. MyLLC.com can do this search for you as well! Bear in mind, though, that even if someone has already trademarked your desired name, you still may be able to use it. It is generally accepted that trademarks are only effective for the exact industry they are registered in.
File Your Company Papers. If you are setting up a corporation, then you will need to create Articles of Incorporation. If you are setting up an LLC, then you will need to create Articles of Organization.
BUT... Okay, okay, get ready for another pithy maxim - "The easiest path isn't always the best path." Annoying, but true nonetheless. Not only do those fill-in-the-blank articles not take advantage of your ability to customize your entity to your needs, but if you get one detail wrong, you could wind up getting your filing rejected. And if high school taught you anything, you know that rejection is not fun.
So, do yourself a favor and hire an incorporating company to handle your filing for you. Find yourself a good one and you'll save yourself a world of hurt. Find yourself a bad one and... well, just be sure to find yourself a good one. Contact your local Secretary of State and they may be able to give you a good recommendation. Any company who doesn't have a good relationship with the SOS, isn't worth their weight in salt.
Now, about the cost... if you are like most, you've probably scanned this article to get to this part, so I'll keep it brief: incorporating should not be expensive. MyLLC.com makes it very inexpensive to form a corporation or LLC. To get pricing with state fees you can go to the MyLLC.com Order Form... MyLLC.com charges only $99 to form a Corporation or LLC. A lot of our competitors also have comparable pricing. So, throw some state fees into the mix and you can usually form your new company for under a few hundred dollars.
You can't get a cheaper and more comprehensive insurance policy than that!
And you're off and running! So, you now have your own official Corporation or LLC that you are operating from. Admit it, you like having that official "LLC" or "Inc." after your company name. I bet you've even ordered new business cards already. Maybe even tried out a few possible logos...
Yes, Corporations and LLCs are sexy (that's what I keep telling myself when I hit the office each morning anyway). Still, there are a few things you'll want to take care of in the next few months, such as putting together a company kit and creating an Operating Agreement or some Corporate ByLaws.
