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October 8th, 2010, 11:18 AM #1
Newbie Starting out -- fear of losing personal assets
- Join Date
- September 28th, 2010
If you're looking to sell your own merchandise along with listing many affiliate links, is a sole proprietorship a good idea?
I'm a little worried about having personal assets accountable in case any legal bs happens.
I haven't registerred myself, but time is ticking on making a decision.
Are any of you a sole proprietor and selling your own product ?? Is it best to be an LLC or Inc for this instance? Is there really anyway for somebody to take all my money for something like ordering/shipping/receiving clothing?
Please share your thoughts. Much Appreciated. Thanks.
October 11th, 2010, 12:14 PM #2
Business Formation Issues
One of the first things you need to do when starting a new business venture is decide on the type of business entity you wish to be. A business can be run as:
• a sole proprietorship,
• a partnership,
• a corporation or
• a limited liability company.
Choosing which type of entity to use in your business venture generally comes down to two issues; limited liability, and taxation.
Corporations and Limited Liability Companies (LLC) offer limited liability to their shareholders while sole proprietorships and partnerships do not. In the interest of brevity, I will not further explain sole proprietorships and partnerships other than to say that if you are in business online today either one of these are clearly not a good idea. This will become clearer as we explain the many benefits of limited liability with regard to corporations and the LLCs.
Truth & Misconception of Limited Liability
There are many misconceptions concerning the concept of limited liability. The premise of limited liability relates only to the investor’s financial responsibility for the debts of the entity. In a limited liability entity, once the shareholder has made their investment they have no further obligation with respect to the entity’s debts. However, a shareholder, particularly a shareholder who is active in the business operations, is still liable for the criminal and tortuous (i.e. negligence, fraud, sexual harassment, etc.) acts they might commit in connection with the business, although the LLC may protect the shareholder from these same acts of their employees if the shareholder had no knowledge. Generally, Limited liability entities do not shield you from lawsuits based on issues other than debt and contractual claims against the LLC.
Double Taxation Issues
While a business conducted as a sole proprietorship or a partnership does not provide limited financial liability to the owners, these entities have an advantage over the corporation when the tax man cometh. For the purpose of calculating taxable profit, corporations are treated as a separate entity and charged taxes on the profit they generate, with the added liability of being assessed at a higher rate than the rate used for individuals or partnerships (which are taxed are the individual’s rate.)
Adding further insult to injury, distributions to shareholders are taxed to the recipient, which in effect taxes the profits of the corporation twice; once as a corporation, and once again when distribution and doled out as income to shareholders.
As you can see, when deciding between running your business as a corporation or as a sole proprietorship or partnership, you need to balance the need for limited financial liability against the prospect of higher tax rates and double taxation. But there is a work around that many smaller corporations use to avoid the double taxation issue.
Single Taxation Solution with Limited Liability
For hundreds of years businesses had to accept double taxation in exchange for limited liability. However, in the 20th century two new options were created for US businesses. One involved registering the corporation with the IRS as an S-Corporation, rather than the standard C-Corporation. This allowed the corporation’s shareholders to maintain the limited liability of the corporation; however, they were taxed like a partnership at the individual’s rate as long as they adhered to a strict set of accounting principles. Unfortunately, these strict accounting principles were a nightmare to handle and created large accounting bills for the S-Corps and consequently S-Corps were not widely created.
The other workaround from the double taxation issue is a late 20th century invention called the Limited Liability Company (LLC). This beauty has all the creature comforts of our beloved corporations with regard to limited liability, while streamlined accounting standards and requirements make it the preferred form of new business entity formation in these modern times.
By providing partnership taxation treatment along with limited liability for shareholders and greatly simplified regulations, the LLC has become the most popular business entity in the U.S. today.
Other considerations in choosing your entity:
1) Accountants generally charge far less for preparing an LLC return than a corporate return.
2) Pass through taxation of the LLC at individual rates.
3) Flexible management and ownership Structure.
4) Less formalities and paperwork.
5) If you are starting a venture where you will have employees, you may find the corporate structure more flexible for the benefits you wish to provide. However, an LLC can be converted to a corporation later in time with very little difficulty. You may wish to plan to begin as an LLC and convert to a corporation later should your tax professional advise you to do so.
Note: If it were not obvious yet, the author of this report feels that the LLC is the best option for new ventures and budding entrepreneurs. However, many of the reasons for choosing one operating entity over another are accounting related. Discussing your plans and the reason for picking an entity with your accountant would be a wise move.Andrew M. Jaffe | [EMAIL="email@example.com"]Email Me[/EMAIL]
Attorney at Law
October 11th, 2010, 12:38 PM #3
Interesting discussion, but it pre-supposes that the business owner has significant financial resources at the start, and that the business will find immediate success. Unfortunately, the vast majority of people entering affiliate marketing have extremely limited financial resources, and their first small profit may be years away.
Also, you totally fail to mention the existence of insurance.
October 11th, 2010, 03:17 PM #4
- Join Date
- September 28th, 2010
That spells things out a bit easier. I'll most likely sign up for LLC for precautionary reasons. From the research that I've done, it doesn't costs much.
Hey Affiliate Hound, any particular insurance that I should look into? Again, I'm a newbie, so forgive me on such basic 101 questions. Thanks!
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