In many European countries it costs considerable money to keep a business alive, REGARDLESS of any income.
In Spain you have to pay €250 a month Autonomo, a social tax, even as a sole trader/freelancer. €250 x 12 months is €3000 (roughly $4000). This is a lot of money to get taxed for nothing annually in a country where minimum monthly wage is in the region of €550 and rent prices are high.
Ever been to Barcelona and wondered why it wasn't the design Mecca it had all the makings of? The fantastic design scene seen in the design of posters, flyers, logos, shops, interiors, all the design festivals, the conferences… yet nothing significant comes out of it. The social tax prevents small business there from starting up, a policy that makes room for large companies.
In Poland, it costs a similar amount of social tax (ZUS) just to stay registered as a company (a sole trader that is, there are higher costs associated with keeping a proper company registered).
It's better in the UK and Republic of Ireland:
In the UK the minimum amount of social tax (NIC) for a sole trader with minimal or no income is £2 per week, which seems fair enough.
In Ireland the social tax (PRSI) is 3-5% of your income but no less than about €250 per year (might have gone up this year). Seems bearable as well.
In both countries (not 100% sure about UK) you can register a Business Name (€20 in Ireland) without having registered a company. In Ireland you can start trading without even registering with the Revenue until you make around €3500.
Finland:
Start-up notification by private trader 75€
Start-up notification by private limited company (min. 2.5k€ share cap) 350€
No liability to collect VAT if annual sales do not exceed 8,5k - unless you are a foreigner with no fixed establishment in Finland.
May neglect the appointment of an accounts auditor if more than one of following are not met:
Balance sheet total exceeds 100k
Net sales or corresponding earning exceed 200k/year
There are more than three employees on average
Self-employed pension insurance (YEL) not mandatory e.g. if not resident, annual work income is below 6 775,60 euro...
Quite easy, but for example dividends are taxed so heavily that Estonia is a good alternative to set up shop.
You should come here mainly because of quality workforce. Finland is a low-paying country for engineers (65-75 % of German average, 60-85 % of French average, 65-80 % of UK average - stats from 2001 though).
If you live in California there's an annual minimum franchise tax of $800, plus whatever annual fees are charged by the state you incorporate your LLC in.
My unused CA S-Corp has been the bane of my existence lately. From the $800 fee to the documentation required to stay in good standing (small, but easy to forget when the company does nothing), it's more pain than it's worth.
If you're someone with lots of ideas and lots of peaks of excitement, it actually might better to postpone incorporation until you can't responsibly continue without some sort of limited liability.
Which is why we invented http://foundrs.com, which is a way to have your cake and eat it too. Don't pay any taxes until your business takes off (at which point you should incorporate), but have a good founder agreement in place so that the compan doesn't explode during takeoff :-)
In California, it is $800 or an amount based on total revenue, whichever is greater. The formula differs for LLCs, S Corps, and C Corps. Furthermore, S Corps do not pay the franchise tax in their first year unless they are profitable.
Generally, incorporation as an LLC is preferable for entities making more than $100,000 in revenue, while an S Corp is preferable for lower revenues.
You can even register a business for things that you might consider a hobby as long as you can earn a little bit of money doing it. For example, I know someone who is an amateur photographer who occasionally takes photos for his friends at weddings or other family gatherings. His business only barely breaks even, but it does allow him to consider his camera and computer equipment as business expenses - things that he would probably spend money on for himself anyway.
this is not exactly true, there has to be a reasonable chance that this is a profitable enterprise defined both by your effort/intention and at least some profitability over a period of time. if it doesn't meet these standards, it's a hobby and you cannot deduct associated expenses. see here: http://www.irs.gov/newsroom/article/0,,id=169490,00.html
You are correct, in this case the person does make a little bit of money from photography, some from friends and some from stock photography sites. He did speak with a tax expert and is apparently in the clear as far as the IRS is concerned. I think his "income" is somewhere in the $100/year range.
My point was just that there are a lot of activities that most of us might be doing anyway for fun, not considering the tax advantages of organizing a business. e.g. amateur photography, helping people with computer and website issues, personal services, blogging, etc.
The point of the business/hobby distinction is to prevent individual taxpayers from deducting losses for hobby activities. If the activity is profitable, the taxpayer gets taxed, so the IRS couldn't care less whether its a hobby or an actual business.
Attempts to generate profit by incorporated entities are, by definition, business activities. For pass-through entities like LLCs and S-Corps, this means that they are treated as business activities for purposes of taxing the managing/active investors.
The activities don't have to have a reasonable chance of being profitable; otherwise, speculative ventures would never be treated as businesses. The key test of whether something is a business activity is whether it generates revenue and whether the taxpayer puts effort into generating revenue. For example: painting is normally a hobby, unless the painter also puts effort into selling those paintings.
If your company registration date is 2 months ago, you will be at a disadvantage in negotiations about price, up-front payments, and other similar things.
OTOH, if you build a compelling product that satisfies your customer by extinguishing his hair on fire (which you should do anyway), then the rest of this is just details. If a prospect will cut of his own nose to spite his face by negotiating price or terms based upon your incorporation date, then maybe that's a customer better off not converted.
There may be good reasons for registering a business now, but this isn't one of them.
For the UK, also worth noting that it's worth getting the printed certificate of incorporation, since you will need that in order to open a bank account.
It's worth noting that one can buy companies 'off the shelf', i.e. companies incorporated some time ago, from many formation agents. I have to say, in the UK at least it's about as easy to see whether a company is trading or dormant and to see its filings as it is to check its date of incorporation, so I'm not sure how much extra utility it provides.
California: A $20 reporting fee and a statement of information are required 90 days after formation and then every two years. An annual $800 LLC tax is due 75 days after formation and every year thereafter. There is a minimum annual fee of $865 if the LLC's net income exceeds $250,000.
Nevada: A $125 fee and an Initial List of Managers and Members are due 30 days after formation. The annual report filing fee is $125. There is no state income tax or franchise tax.
Delaware: There is an annual LLC tax of $200 due each June 1, beginning the year following formation. There is no state income tax.
New York: Every LLC must publish notice of its formation in two newspapers in the county in which it was created. In some areas, the fees for this publication can run up to $2,000. The company must then submit a certificate of this publication to the state, together with a $50 filing fee. For LLCs that choose to be treated as a partnership, there are annual fees that increase based on the number of members the company has (from a minimum of $325 to a maximum of $10,000).
In New Zealand: NZ$10.22 to reserve the name (a necessary prerequisite), NZ$153.33 to register the company (total cost ~ US$126.50). There are no fees or taxes due for companies with no income.
Companies are legally required to file an annual return to the companies office (there are no fees for online filings). Annual returns can be as simple as confirming company details, stating the date of the AGM, and indicating a resolution not to appoint an auditor was passed.
Tax returns (and company tax payments as a percentage of before-tax profit) are required by a separate government department if any income is earned, but not if no income is earned.
Name changes cost $10.22. Changes to the company addresses, director details / addresses, or shareholder details / addresses must be notified by law (changing the details online is free).
Where can you register a business for $30? Most states have fees for registration closer to $100 a year and any website you use is also going to charge you a fee upwards of $100.
Varies according to business type. My Sole Proprietorship was about $25 four years ago.
[edit]
And that's one nice thing about the US: how quick and easy it was. I literally only created a business name and got a bank account because a customer wanted to pay me by check instead of the usual PayPal. The dollar amount was well worth it, so I took the check, registered the business and opened an account to deposit it all within a week or so.
Companies that check out your years-in-business history (one of the central points of the original article) normally do not go for sole proprietorships. If an RFP says, minimum 3 years in business, the next line is usually, minimum X number of employees.
As far as costs, yes, it may cost you $25 to register your sole proprietorship but then it will cost you hundreds of dollars to file your year-end taxes, plus all the quarterly's. Add hundreds more for UBT. Plus most states get you in other ways, e.g. the metropolitan commuter tax in New York.
Sole props are the cheapest, simplest tax structure around.
I don't know why you think it costs "hundreds of dollars to file." Perhaps you're talking accountant's fees? My tax accountant does the Schedule C for about $75 extra as part of our personal taxes annually -- I just provide him with a P&L statement for the year. For previous businesses I did all the taxes myself: the IRS provides lots of easy to understand, free publications for small business. Hell, I did a few years of 1065 (Partnership) returns (stupid decision to form business as partnership!) myself and those are awful.
I agree with your point that sole props are cheap and simple. My comment was within the context of the submission. The author recommended creating a "placeholder" entity to be able to pass years-in-business requirement, and unfortunately, for situations where that requirement exists in the first place, a sole proprietorship is not going to fly.
And yes, I meant accountant's fees. You don't just have your IRS filings, you also have the state and the city which depending on your location require multiple filings plus UBT and other complications. So you have a minimum of 15 different filings (1 yearly plus 4 quarterly, times 3 for federal, state and city), and usually more. I am not sure where you live - personally, I've filed in the US, East and West coast and Midwest and it's never cost me anywhere near $75. Perhaps you and your accountant have been ignoring deductions, self-employment taxes, UBT, etc. I simply don't see how you could have a professional CPA charge $75 for all that.
As far DIY tax prep I think it's a waste of your time to understand all the complexities. Tax requirements change every year and sometimes mid-year... if you are a consultant, your time is best spent doing what you know.
(So did I understand correctly that your accountant files just one yearly form in addition to your personal taxes? That doesn't sound right. If you are not in the US, you can probably gamble on not being audited, otherwise I'd be looking for a new accountant asap, and paying him to re-file your previous years as well).
Hmm, I was told by someone I trusted that you could. Upon further research, looks like you might be right. I'm going to do some more research on this and update the blog post.
Edit: updated the post. Thanks for the correction.
In the UK, I've used two, without any trouble. I can't remember the name of the first one, but the last one I used was https://www.companiesmadesimple.com ...
My CPA recommended "The corporation company" ( incorporate.com ) to save the hassle, but web reviews are mixed. Anyone have experience with a simple, reasonably cheap, incorporation service?
What websites would you recommend to register a SAAS company. I'd guess that a Delaware LLC might be the best way to go? Can anyone with experience chime in?
fwiw, I created a company with 100 shares of which I took only 1 at time of creation.
Apparently this makes things easier if/when you come to distribute shares to others as it will be a simple allocation of unallocated shares rather than a more convoluted 'transfer' process.
so if I were to create a website that (hopefully) generates money and in the future I'd like to add investors/workers, I should already start thinking about "shares?"
In Spain you have to pay €250 a month Autonomo, a social tax, even as a sole trader/freelancer. €250 x 12 months is €3000 (roughly $4000). This is a lot of money to get taxed for nothing annually in a country where minimum monthly wage is in the region of €550 and rent prices are high. Ever been to Barcelona and wondered why it wasn't the design Mecca it had all the makings of? The fantastic design scene seen in the design of posters, flyers, logos, shops, interiors, all the design festivals, the conferences… yet nothing significant comes out of it. The social tax prevents small business there from starting up, a policy that makes room for large companies.
In Poland, it costs a similar amount of social tax (ZUS) just to stay registered as a company (a sole trader that is, there are higher costs associated with keeping a proper company registered).
It's better in the UK and Republic of Ireland:
In the UK the minimum amount of social tax (NIC) for a sole trader with minimal or no income is £2 per week, which seems fair enough.
In Ireland the social tax (PRSI) is 3-5% of your income but no less than about €250 per year (might have gone up this year). Seems bearable as well.
In both countries (not 100% sure about UK) you can register a Business Name (€20 in Ireland) without having registered a company. In Ireland you can start trading without even registering with the Revenue until you make around €3500.