I have been working on something that has in the past been considered more of hobby. A couple months ago I got laid off from my full time job and have had a lot of time to devote to this venture. I have gotten a good bit of business from this and think that next year it will be my main source of income. I do not have a DBA or LLC, or much of anything for that matter and I'm not entirely sure what is most appropriate for me to get. Is a sole proprietorship enough or should I get an LLC? Also, since this year is nearly over, should I wait until the new year to take care of this?
Information about my business. I build electronics for musicians, where I am the only worker, with some help from my partner. I don't expect to do an enormous amount of business, however, I would hope to sell some products to a wide range of customers. The stuff that I make has custom graphics. Though I am very careful about what graphics I put on, I do not want to worry about copyright issues if the arise. Thanks for any help.
The primary purposes of forming an LLC or corporation are:
1) Liability protection
2) Tax advantages
To determine whether it is beneficial for you to form a company or simply operate as a sole proprietor you should consider whether you are comfortable being personally responsible for the business liabilities (and potential lawsuits), and the taxes you will pay as a sole proprietor vs a corporation. Keep in mind an LLC can be taxed by the IRS as a sole proprietor, partnership or as a corporation - it is up to you as the LLC owner to take the election to be taxed as a corporation if you choose. Read more about LLC filing status options from the IRS here: http://www.irs.gov/uac/Form-8832,-Entity-Classification-Election As for tax advantages, in general a sole proprietor will pay a lot more in self employment tax (especially if your income is in the $70k range or more). This is where forming a company can help you reduce your tax bill by giving you more options for paying yourself that allow you to take advantage of corporate tax breaks.
It is always wise to consult with law and tax professionals when deciding how to set up your business. What you spend on that in the beginning can save you many times more dollars later on in the form of tax savings and asset protection.
As for when to form your company, this is largely dependent on whether your state requires you to renew filings annually at the beginning of the year or annually on your renewal date. Ie in Nevada the state renewals are due at the end of the month 1 calendar year after you did your initial company setup, so a company formed now (Dec 2013) in Nevada would be due for renewal by the end of December 2014, then every December after that. Check reporting and renewal requirements in the state in which you plan to form a company.