149 The Ins And Outs Of Starting An Official Business In The United States – With Mike Montali

Who: Mike Montali
Website: Harbor Compliance
Blog: Harbor Compliance Blog
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Who is Mike

Mike Montali is the owner and founder of Harbor Compliance, an online service tool that specialize in helping business owner or owners with their government filings to help them get registered and / or stay compliant. They also help with business tax registration and a lot more.

The website’s Information Center is a useful tool that will give you a lot of ideas about any requirements you’ll need to have before registering your business, may it be small or large businesses or non-profit.

Notes from Podcast Episode

Types of Businesses (Based on the number of owners)

Sole Proprietorship

• You are the only owner.
• You as the owner and your business are one and the same. There is no separate legal distinction between you two.

Example: I am blogging. I am making some money. I file my taxes on the money that I make, I am considered to be a sole proprietor.

Partnership – A company has two or more owners

a. General partnership

• The business and the owners are one and the same.
• Not registered with the government to form an LLC or incorporated.

b. Registered partnerships

• Not common.
• Usually more for real estate investments or legal firms.

Example: Two of us started this blog and we’re making some money, we’re filing our taxes, etc., we are considered to be in a general partnership.

B. Business structures separate from you as the sole proprietor

Limited Liability Company, LLC – Suitable for most small business owners

Corporation 

Benefits of registering as an LLC

•  Limits your liability. *liability risk – risk of being sued from people who you've contracted with for the blog.
• The potential for suit happens anytime money is being made from business transactions.
• Potential sources:
  • affiliates
  • vendors who helped with the blog
  • employee
  • guest writer of the blog
  • other individuals who have made a contract with you
• LLC provides a layer of protection between the business owners and somebody who might potentially come after them

Example: The income gets passed through to the owner. The owner has that liability shield so that, if someone were to try to sue the owner, they can only sue him for whatever assets the business owns but, not his personal assets.

More of the other benefits can be found here.

Note: Sole proprietors and general partners may be sued personally since they are not separate from their business. Any of their personal assets, could be used to pay a debt, whether it’s the result of a lawsuit or otherwise.

 Business Structure Differences

Limited Liability Company	Sole Proprietorship	General Partnership
profits and losses of the business has through to the owners and those profits and losses will be shown on the owner’s individual tax returns	profits and losses of the business has through to the owners and those profits and losses will be shown on the owner/s’ individual tax returns
Owner is paying its own taxes rather the income; business itself is not paying taxes	Sole owner of LLC is paying the taxes, not from the income of the business.	Owners split the income and have it shown in their annual tax return.*

* If a business has an income of $100,000, their Form 1040 will reflect an income of $50,000 each.

C- Corporation	S – Corporation
Includes almost all big businesses, large fortune 500 companies	Small businesses***
has double taxation**	Taxation is similar to an LLC or sole proprietorship****

** The corporation will pay taxes, and then any income that is distributed to the shareholders would also be taxed again.

*** These are businesses with under 100 shareholders, who are also residents of the United States.

**** The income is flown through to the individual tax return of the owner.

LLC	S – Corporations
if the company has more than one owner, it has the ability to provide payments however it chooses	Less flexibility; money is distributed based on the shares represented
	corporations have more formalities and records keeping that they have to keep up

Registering Your Business as an S-Corp

Pros:

• The ability to help the owners save a bit of money on their self-employment tax
• Must pay the owners what’s considered a reasonable salary for their position in the business
• Any surplus profit can be provided as a dividend to the shareholders (self-employment tax would not apply)
• Option to provide some of the profits as dividends which would have a lower taxation rate.

Cons:

• Pay payroll tax on that money that goes to the owners
• More administrative burden of filing the payroll tax returns
• Potentially have some additional taxes

Dividend – money that is provided to the shareholders, not as a salary but, as a distribution of profit

Note: LLC is NOT recognized by the IRS as a tax structure. It can adopt any of the existing tax structures which could be a sole proprietorship and S-Corp or C-Corp. The IRS has been totally accepting of that approach (bouncing from an LLC to an S-Corp and later to a C-Corp).

Registering Your Business as a C-Corp

Advisable if:

• Looking to be funded by venture capital or have a significant amount of investors
• Considering retirement plans and health benefits

Note: Should be reviewed with an accountant.

Registering Your Business (Within your state)

State level

• Choose your state – If running a small business, it is best to choose to register in your home state.
• Check the requirements in that state.

What does it take to form the LLC in that state?

• Prepare and submit a document (may be referred to as Articles of Organization or Articles of Formation or a Certificate of Formation) that you would provide your:
  • business name
  • the principal address of the business
  • most likely a registered agent
  • the name of the individual who is organizing or setting up the LLC
• Sign that document.
• Submit that to the state along with their file fee.
• Submit supplementary documents

Federal Level

• Apply for an employer identification number or, an EIN or Federal Employer Identification Number or FEIN – unique nine-digit number that identifies your business

• • Most banks will require that an LLC have an EIN in order to open a bank account
  • It is used in everyday business.
    • Vendors would ask for that number.
    • You would use it to file your tax returns
    • Having an EIN would allow you to use that number instead of the owner’s social security member.

• Internal records keeping requirements
  • won’t be filed with the government but, should be kept in the company records for an LLC
  • It is important to have an operating agreement, a legal agreement between the owners and which specifies how the LLC is governed
    • Who owns it?
    • How a voting occurs?
    • How will decisions be made in the business?
    • What happens if somebody leaves the business?
    • What happens to their ownership in the business, and even for single member LLCs?

You can use the information provided at the site for some overview of what the paperwork would be required, what the filing fees are and how long that particular state takes to process all those paperwork.

Registering your business out of state

Rule of thumb: Less than five owners or less, it doesn’t make sense to register outside of one’s home state.

Why?

• “Say your business is in Michigan and that’s where you live. That’s where you do your work. If you register your business in Nevada, Michigan is going to consider you a Nevada business doing business in Michigan. They will still require that you register there and so, you’re not necessarily going to get those tax benefits because you’re doing your business in Michigan.”

• You created two sets of filings and fees with those two different governments;

• You created some additional cost.

• You created some extra work for yourself in keeping up with the annual filings of the state while not necessarily receiving any benefits.

Notes:  Bloggers who may move from one place to another are still not advised to register out of state. If a business has several owners, it’s best to ask your tax professional or your accountant.

Question: If you have multiple blogs, should you register multiple businesses?

Answer: If you are the sole owner of the blogs, it’s best to simply register one business. If there are multiple owners with multiple ownership structures, then you should consider multiple businesses.

Pros:

• You don’t have to worry about registering multiple businesses and maintaining them, and paying the fees to set them up, and annual fees in your state.

Cons:

• You have all these different blogs under one business, and if there were to be a lawsuit, then something that could arise with one of the blogs could affect the entire business as a whole which include another blog.

Note: A good strategy would be to start as a single business and then, later on register another and kind of funnel the other blog / business into that second entity.

Also, revenues would be easier to keep track if businesses were separate. Sit down with your accountant / bookkeeper and determine what would be best.

“Do you want all of the incomes from the two blogs to be combined into one business or would you rather have them be separate and know this is what the one blog is making and these are the expenses of the one blog that is separate from the other?”

Remaining Compliant After Business Registration

• This will depend on type of business. Corporations will have more to keep up with.

What is the annual filing requirement in that state? 

• Annual Report or an Annual Registration
• A small fee to the Department of State

Note: Never miss a filing because the penalties in some states are steep.

About The Podcast

Learning With Leslie is a podcast dedicated to helping you build a business around a blog. No, not one of those blogs that will fall by the wayside when Google has a mood swing, but one that will thrive no matter what gets thrown at it.

I share tips and strategies that I’ve learnt building blogs since 2008 and interview experts who are knowledgable about various aspects of blogging so that we can learn from their experiences.

If you’re a blogger, thinking about becoming a blogger (pun intended) or are not even sure if blogging is right for you, go ahead and tune in to see what this blogging thing is all about.

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