How can we create our dream business from a simple hobby?
Should we start an S Corp or LLC? Here are four things to consider when making your hobby your business: what is an S corp or LLC, the difference between an independent contractor and and employee, hiring employees for full-time or part-time, reviewing a Non-compete agreement as it relates to right to work states, and most important; choosing S Corp or LLC .
So many times we become great at a hobby, and a friend or even a new acquaintance will ask you that question heard all too often; “Why don’t you go into business?” “You are so good at this.” It could be anything, mechanic, photographer, baker, personal trainer or hair dresser. Did you know that the majority of businesses today started from that question? A poor boy, who’s life had no meaning other than drawing cartoons for the local paper became one of the most noted business owners in the world; Walt Disney. “If you dream it, you can do it.”- Walter E. Disney.
What Type of Business Should I Form?
S Corporation (S Corp) or a Limited Liability Company (LLC)?
Lets say your hobby is working on cars. You have been fixing cars since you were 16 in your parents’ driveway and now an opportunity is knocking on your door. Your friend has an open garage next to a grocery store that you can lease for a great price. You have some tools, and you know in your heart that you could make this hobby a operational business. Should you open this business as an S Corp or LLC?
First, you need to decide what each type of entity could do for your business. What is an S Corp? What is an LLC? Are there more benefits to one entity than the other?
What is the Difference Between S Corp or LLC?
What’s a Subchapter S Corporation?
At the state level, it’s filed as a “plain vanilla” corporation, but if it meets certain requirements and elects to be treated as a “small business corporation,” at the federal level it can enjoy distinct tax benefits.
The Subchapter S Corporation is an attractive form of doing business because it combines the business and legal characteristics of a corporation with many of the income tax characteristics of a partnership. For flow-through of profits and losses to the owners, the Subchapter S Corporation is treated in a manner similar to a partnership. For other purposes, such as limited liability, distributions, redemptions and reorganizations, the Subchapter S Corporation is treated much like a regular corporation.
What are the tax benefits of a Subchapter S Corporation?
A regular Corporation is subject to federal and Florida Corporate Income Taxes. Therefore, profits are taxed first on the corporate level and then again at the individual level of the shareholders to whom the profits are distributed.
This double taxation could result in a combined taxation rate of 70% or higher! A Sub-Chapter S Corporation is exempt from federal and Florida corporate Income Tax, so that the earnings of the Corporation flow directly to the owners.
What are the requirements of a “small business corporation?” A small business corporation is a domestic corporation that:
- Is not an ineligible corporation (such as a bank, insurance company, possessions corporation or domestic international sales corporation);
- Does not have more than 100 shareholders (spouses and families are now counted as one shareholder);
- Does not have shareholders other than individuals, estates, certain trusts, or certain tax-exempt organizations;
- Has no nonresident alien shareholders; and
- Does not have more than one class of stock (i.e., has only common stock, not both common and preferred).
What is a Limited Liability Company?
The Limited Liability Company (“LLC”) is a hybrid entity that is very flexible and, depending on how many owners (known as “Members”) and what such Members elect to do, may be taxed as a partnership or corporation, if it has multiple Members, or as a sole proprietorship, if it has only one member, while providing limited liability protection for all of its Members.
For federal tax purposes, an LLC, like a partnership or sole proprietorship, is a pass-through entity; thus, its income and losses are taxed only at the member level. However, all members of an LLC, like the shareholders of an S corporation, have limited liability for the debts and claims against the LLC. No member will be burdened with the personal liability
Decisions; Decisions!
You have decided that this is going to be your own business. With out question, you are going to be the business’s sole proprietor. You’re not really sure if you will be able to create the business with the limited resources you are currently holding. To incorporate your business as an S Corp would be an ideal choice. Limiting your own personal liability is your first priority. By Creating your corporation, you have taken the responsibility of your business off of you and your family. “Your Car Shop” is its own entity now.
Now that “Your Car Shop” is alive, you have access to all the benefits that a business provides. This means that investors who might not have otherwise been interested are now acknowledging your business. You are now eligible for that line of credit that will help your business get off the ground and working. Tax breaks are another one of the many benefits that your new company will be privy to. If something happens to you or you wish to retire the business you are able to transfer the business to whom ever, or even sell the business without having the business expenses being forced upon you or your family.
When you’re ready to form an S Corp or LLC; we can help! Simply visit www.AmeriLawyer.com to get started.
What types of workers should I hire?
Hiring an employee or an independent contractor.
A big aspect of running a business is knowing that your super powers end at “human.” For this reason, it is likely that you will need to hire employees to help run your business. What kind of employee are you looking for? If you know that winter is coming and “Your Car Shop” specializes in snow tires, you may want to hire some additional employees for the winter season.
Lets define an employee and an independent contractor. If you direct the manner in the means of the work; they are employees. You, the business owner, instruct the employee as to the time they come in, how they conduct their everyday work, and when they can take a break or a day off. The independent contractor can be given a time to come in to work. However, the business owner does not give specific instructions as to how they preform the work or complete their work. The independent contractor does not have tax withheld from their pay, nor do they receive company benefits included with their employment.
It is in good advice that the business owner first has a written agreement with and places each employee or the independent contractor on payroll and shows that they are accounted for. If the employee gets hurt on the job, reports their injury and they are not listed on your payroll, you may be flagged for investigation. This may mean that you would need to seek legal representation, and possibly lose a lot more that just a business.
We can help you create your employment or independent contractor agreement on our website www.amerilawyer.com
How does a non-compete agreement work?
Can I Be Sued for Creating My Own Business?
It is safe to say, that many people find friends or associates because they have a common interest. You are aware that your company, “Your Car Shop,” is the same nature of business as your friend”s garage called, “The Car Shop Down Block.” You once worked as an independent contractor for the owner of “The Car Shop Down the Block.” When you started working in his garage you signed an agreement that assured him that you would not open another business like his for one year after you terminate your employment with him. Its not like you knew an opportunity was going to open up this quickly. As a matter of fact, you probably quit so that you could pursue the new business.
Can your friend sue you for opening “Your Car Shop” a couple months after terminating your employment? The nature of a non-compete agreement is so restrictive that often times they are not enforceable. It would be suggestible to seek legal advice on your specific case. In general, all agreements that restrain a trade or work are illegal. Please keep in mind that there may be some states that allow exceptions. To create the exception, the business owner would have to request a judge to determine the details of the contract. The judge then rules on a reasonable duration of the contract, and the type of restricted activity.
Plan Your Work and Work Your Plan
“Your Car Shop” is on its way to great things. It takes a lot of hard work and dedication to start your own corporation. There are so many avenues that you can travel with your business. In order to keep it on track, you have to stay focused and market your business correctly. Market your business well and don’t forget to, “Plan your work, and work your plan.”
Listen to Our Radio Show
You can also listen to our radio show episode for complete conversation on “Hobbies Becoming a Business” by viewing the video below. Please visit our YouTube Channel for 20 additional episodes of valuable insight on “How to Start, Expand, Buy or Sell Your Business”.
https://www.youtube.com/channel/UCBbWg0TlRsWsP1Ocsyf2Prg/videos
ARE YOU READY TO START YOUR BUSINESS?
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Not Ready? Have More Questions?
If you are a member of Spiegel & Utrera, P.A.’s General Counsel Club and have business related questions, call (800) 734-9900 or ClubAssist@AmeriLawyer.com for assistance. Remember, as a member of the General Counsel Club, you receive unlimited legal, business, credit and tax advice all year long.
Spiegel & Utrera, P.A. is a corporate law firm with its main offices located in Miami, Florida with offices throughout the United States. As a law firm, we do more than just help you form your business entity. We stand ready to help with the maintenance of your legal business entity! We will assist you with Incorporation Service, Trademarks, Copyrights, Estate Planning, Legal Counsel, Wills,Trusts, Agreements & Leases, Corporate & Company
References:
https://www.biography.com/people/walt-disney-9275533