The Chicken and the Egg--When to incorporate

jforrestjforrest Posts: 4subscriber
edited October 2006 in Business Planning
My partner and I are about to take the next step in starting our business--writing the business plan.  However, we are considering forming an LLC beforehand, so that any expenses we might incur during the planning stages can be attributed to the business.  But it also feels strange to be incorporating without a solid business plan to back up our idea.  So I ask you, what comes first?  The business plan or the formal incorporation?Also, along these lines, if we decide to form an LLC before the business plan, how do we divide up ownership if we know that one partner will eventually invest more $ than the other?  Do we start out as equal partners and then essentially the partner who invests more will "buy" shares from the other partner?  Or do we come up with a division of shares proportional to the max. investment we each think we make, say, in the first year of operation?  For instance, let`s say he can invest a max. of $40k in the first year, and I can put in $60k.  We split ownership 40%-60%.  Then let`s say $10k is needed to cover the initial startup costs.  I would put in $6k and he would put in $4k.  Is that a sensible arrangement?

Comments

  • keyconkeycon Posts: 34subscriber
    Jforrest.
    Personally, I don`t see an issue doing either first. You can be in business without being incorporated anyway. Many people take business write offs without being "officially" structured. If you guys are serious, a structure makes sense to protect your personal assets. As far as the split of ownership, if you know the actual split before you LLC, make that part of the By Laws and stock offering. If not, do it later - no big deal based on my experience.
    IMHO, every person in America should have a business. The laws of America are constructed to benefit the small business person. This country was built on the back of the small business person and everyone has the opportunity to take advantage of the laws. We are a capitalist society and even with all the media talk of how bad big faceless corporations are ... I would not want to live in any other society. I`m not letting a few bad apples spoil my opinion of capitalism. I just wish it was more Laissez-faire (butt out government). Small business makes America run. Run with it. But you don`t have to be structured to take advantage of the benefits.
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  • NuevolutionNuevolution Posts: 30subscriber Bronze Level Member
    Jforrest,It does`nt really matter what step you take to starting your business. If you incorporate now or later. The  major advantage that you have now is that, it can all be a tax write off at the end of the year.
    Another advantage is; you`ll be starting off in the right direction "You are protecting your assests".What I mean by this is, let`s say you start off as a sole proprietor, that means you have to use your Social as your federal ID (EIN). As an LLC you can get a FED TAX ID for your Company and down the line if you ever want to build business credit you have history to prove it. If you incorporate down the line, They only take into consideration the day you incorporated unless you can show proof that you been in business for "the time you weren`t an LLC"How you divide the company is up to you, It doesn`t necessarly mean`s you have to do a 40% / 60% split. It can be a 50/50 or if its between 4 people you can divide it how ever you guys decide to split the LLC. The person that invests the most money is not always the one that owns more of the company shares, some can invest man hours as a compensation for money. Let me tell me give you an example, I incorporated awhile back, and when I incorporated, my money flow wasn`t that great "I was barely getting by" So one of the directors decided to invest some cash because he`s a single guy, and had the cash to invest. Regardless of his financial situation I own 80% of the corporation, Why? because not only do I put in as much money that I can, I also put about 80 work hours a week in comparision to him, he only puts in 2 or three a week. So how you split depends on a few factors1. How many (man hours) a week will you be putting in?2. How much cash are you going to put in and then, the man hours. If I where in your case, I would just form a C corp and file your taxes as an S corporation, Why? you avoid the double taxation law, and! at the end of the year everything gets passed down the the owners. Plus you only pay taxes on whats left over after you paid all your Vendors, Employees, and so forth. So lets say you profited 120K and after you paid all your expenses, your total earnings are 20K, that`s all you pay taxes on.I can go into legal terms but to keep it simple I am explaining it in simple english.
  • pepperlegalpepperlegal Posts: 2subscriber
    Allow me to be the contrarian.I ALWAYS advise my clients to draw up the business plan first, or at least have something very close to a plan.  If you don`t plan on starting the business before creating your business plan anyway, you really can only benefit by having the plan done first.  I typically find that through the business planning process, you may flush out a bunny rabbit or two that you hadn`t considered, which can help shape your decision regarding (a) the proper business formation, and (b) the nature of the agreement between the pair of you.
  • LauraLeeLauraLee Posts: 0subscriber
    I must agree with PepperLegal; a business plan should be
    done first to really hash out where you want to go with your business. 
    Once this is done, it will help you to decide what type of entity your business
    should be.  Depending on the nature of the business incorporating may or
    may not be important in the start up phases.

    As far as deductions go, your business expenses are deductible regardless of
    your business structure.  If you are operating as a sole proprietor you
    show income and deductions on a Schedule C  on your Individual Tax Return,
    regardless of whether or not you Itemize deductions on a Schedule A.

    Also, you can establish credit in your business name, while operating as a sole
    proprietor simply by filing the appropriate papers with your state, registering
    as a DBA and obtaining a Federal Identification Number (Form SS-4) from the
    IRS.  You do not need to be incorporated in order to do this. 

    It really is best to talk to a lawyer about your specific circumstances to
    determine what the best structure for your business is.  Having your
    business plan written will help them to give you the best advice

    HTH
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