Forming a Home Business Corporation

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I'm in the process of converting the independent contracting work I've been doing at home into a corporation because a new client I want to work with requires corporate status.

I've been looking at the information on Legal Zoom.com, BizFilings.com and incorporate.com. I've also looked on New Mexico's government site and downloaded the required forms to study while I decide which form of a corporation would be best for me.

It looks to me like an LLC (limited liability company) would be the best form of corporation for me. Are there any negatives to an LLC vs. sole proprietorship that I should be aware of?

Other than the difference in cost, are there any negatives to having one of these sites do the paper and footwork for me rather than hiring an attorney to do the same thing they will do?

Also, I'm a bit confused by some of what I am reading. One site says it takes two people to form an LLC but only requires one person to work/manage it. Another site says it only takes one person to form an LLC. Anyone know which is correct?

Does it make any difference what time of year I form the corporation? With it being so close to the end of the year, I'm wondering if there is any benefit to finishing the process before year-end or postponing it until the new year for tax and reporting purposes.

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Type: Question • Score: 4 • Views: 2,003 • Replies: 15

@Butrflynet,

I'm not one to ask, but will be listening to what you learn.

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@Butrflynet,

Since I don't know the answer, would the client accept a sole proprietorship if you obtained an EIN number? They may just prefer not to use a SS # on the 1099s, though it is acceptable.

For what it's worth, I have worked for an S Corp in which all stock was owned by the president. Only vaguely aware of LLCs, but in an S Corp the income flows to the owner, just as a proprietorship. A corporation can pay wage or salary to the owner, while a proprietorship cannot. Offhand, the only downside I can think of in incorporating is that when you fold the business, you need to formally decorporate, which can be annoying for a one person operation. Also, unless banking rules have changed, you will probably not be able to get by with a dba checking account.

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@roger,

Hi Roger, I was hoping you would respond since you have the accounting background and may have more knowledge of this than I do.

They require the legal name of the corporation, the state of incorporation, the Fed EIN and the person's corporate title and they say they verify the info with the state of incorporation.

This morning I got an email from them saying they don't accept a sole proprietorship. They will only subcontract with incorporated legal entities in the form of C Corp, S Corp, or LLC. (I'm not sure I understand what the difference is in an S Corp and a Sole Proprietorship. I thought they were the same thing. I'll have to study on that some more.)

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@Butrflynet,

If that's their requirement, that's their requirement. It's up to you to decide if it's worth the time, money, and aggrievation that it will involve.

I think the most important difference for many businesses is the corporate shield, though I don't see it doing anything for the business I believe you to be involved in. A corporation could be sued for everything it owns. A proprietorship could be sued for everything the owner owns.

Did I mention wages and salary? A corporation can claim as expenses all wages and salary, even those paid to the owner. A proprietorship cannot. At the end of year it pretty much comes out the same. So far as other tax deductable expenses are concerned, I don't believe there are any differences at all. Since you will be paying yourself if you form a corporation, you will likely become fully subject to at least quarterly filings for both state and federal taxes. I'm not sure if you can exempt yourself from state and federal unemployment and worker's compensation. There won't be much money involved in a one person operation, but they're something to keep up with. You can be penalized if you miss a timely filing.

I imagine you are already current on NM CRS - 1 filings, so you would only have to add the payroll information. The fed 941 will be an easy form, but you will be paying taxes quarterly if you are not already having to do so.

I knew a person who formed a corporation for the family business by herself, so it can be done. That was at a time when the internet was pretty much a novelty - 1998 or earlier.

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@Butrflynet,

Butrflynet wrote:

This morning I got an email from them saying they don't accept a sole proprietorship. They will only subcontract with incorporated legal entities in the form of C Corp, S Corp, or LLC. (I'm not sure I understand what the difference is in an S Corp and a Sole Proprietorship. I thought they were the same thing. I'll have to study on that some more.)

It's been a few years since I formed a corporation, but off the top of my head: To form an S Corp, you first form a C Corp (Articles of Incorporation filed with Secretary of State, or other appropriate agency), then you make an S Corp "election," using the appropriate IRS form. As I recall, you must make that election within a certain timeframe of forming the C Corp, in order to have S Corp status. There are limits to an S Corp in order to qualify as an S Corp (such as types of stock, limited number of of shareholders, etc.). An S Corp has pass-through tax treatment, meaning there is no double taxation, as there is with C Corp. With either C or S Corp you have the limit to your personal liability. As Roger said, that is probably the number one reason to incorporate -- limited liability. Corporations have to file annual reports with the State, and they must file their own tax returns. They must also hold annual meetings, with minutes kept.

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@Butrflynet,

Butrflynet wrote:

Also, I'm a bit confused by some of what I am reading. One site says it takes two people to form an LLC but only requires one person to work/manage it. Another site says it only takes one person to form an LLC. Anyone know which is correct?

One person to form. You should read this document:

www.nmprc.state.nm.us/corporations/pdf/charter/dllc.pdf

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just reading and listening....

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@trying2learn,

I seem to recall you had serious individual taxation expertise. Does it extend to taxation of business? This could be helpful, on down the road.

1 Reply

@roger,

roger wrote:

I seem to recall you had serious individual taxation expertise. Does it extend to taxation of business? This could be helpful, on down the road.

Yes I do know individual taxes as well as partnerships, corps, estates and international taxes within limits.

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@Butrflynet,

Butrflynet wrote:

I've been looking at the information on Legal Zoom.com, BizFilings.com and incorporate.com.

I've used the latter for several companies, nothing in particular to say about them other than does what it says on the tin.

Quote:

It looks to me like an LLC (limited liability company) would be the best form of corporation for me.

In your type of situation it almost invariably is, this is what I've chosen so far as well.

Quote:

Other than the difference in cost, are there any negatives to having one of these sites do the paper and footwork for me rather than hiring an attorney to do the same thing they will do?

The only reason I can think of for you not to use the sites is if you desire more consultation from a real person, the sites are pretty much going to have you fill out a form and they'll submit it for you. I'd be surprised if a human ever looked at it in earnest (but then again, this isn't rocket surgery).

Quote:

Does it make any difference what time of year I form the corporation? With it being so close to the end of the year, I'm wondering if there is any benefit to finishing the process before year-end or postponing it until the new year for tax and reporting purposes.

Definitely worth postponing as it complicates your taxes, no reason to complicate this year's taxes for no good reason if postponing is a legitimate option (says the guy who incorporated one company in a December).

1 Reply

Thanks for the info and advice, Tico and Robert. I'm going to take my time before making the leap into this. Have been doing a bit deeper investigating of this company that I intended to do work for and my spider senses are telling me something isn't quite right. They have very mixed reviews with the Better Business Bureau.

I'll use the time between now and the first of the year to give it a lot more thought and ask a lot more questions of them.

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@Butrflynet,

Mixed reviews as in not paying their vendors?

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@Butrflynet,

As always, my advice is to pay attention to your intuition.

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@roger,

Some of the reviews about them have been complaints about their proprietery software not working right the majority of the time, being unresponsive to their contractors, slow in paying contractors and a few other types of complaints. Other reviews can't sing their praises high enough.

The Better Business Bureau of Florida gives them a rating of A+, however there have been 88 complaints filed with the BBB against them in the last 3 years. There are no specific details on the BBB site, but I've been able to get a good idea of what the complaints were about by reading reviews on other sites.

Complaint Type Total Closed Complaints

Advertising / Sales Issues...........................40
Billing / Collection Issues............................3
Delivery Issues........................................1
Problems with Product / Service...................44
Guarantee / Warranty Issues........................0

Total Closed Complaints............................88

I'm going to look into working for one of their subcontractors for a month or two so I can see what is really going on before I plunge into it myself. I'll have to pay the subcontractor a set fee each month, but it will be worth it if it turns out to be not as it was represented.

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@Robert Gentel,

Robert Gentelq wrote:

Definitely worth postponing as it complicates your taxes, no reason to complicate this year's taxes for no good reason if postponing is a legitimate option (says the guy who incorporated one company in a December).

Wow that brings back memories, December 1992. Still just reading along....

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Forming a Home Business Corporation

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