Ask HN: When to Form LLC/Bank for Side-Projects? | Hacker News Reader

Ask HN: When to Form LLC/Bank for Side-Projects?

22 pointsgigabet6 comments

There have been a handful of topics on AskHN recently regarding starting an LLC [0], stripe atlas, banking for side-projects etc; that I have found helpful. I was curious to ask others how they handle new business setup for working on side-projects.

As I've worked on dozens of side-projects over the years it never seemed logical to open a new LLC and new bank account for each one. It made more sense to just build them as 'myself' and then if they ever started gaining traction/revenue to start exploring splitting it out into its own business/banks.

Now I fear that could create issues down the road for both liability and accounting purposes by having my personal self/banks attached to it even during a brief amount of time. What is the correct way to handle this?

One option I considered was starting an LLC/Bank for 'all side-projects', and then if/when a particular one started producing revenue I split it off into a separate business/bank. This I suppose adds a layer of liability and accounting complexity between my personal accounts, but I'm not sure if this solves the issue completely.

Any suggestions on proper way to handle?

[0] https://news.ycombinator.com/item?id=20009534

I strongly recommend waiting until you get to one of these stages:

1. Formal agreement between partners on project - Time is your most valuable asset so if you are investing into the project with additional persons it's best to formalize structure once you've made an agreement and are at a place where you are each committing 10+ hours per week

2. Monetary Investment is being made - At the point that meaningful monetary investment is made which I would pin at $10,000. The cost to formalize an LLC in California is $800 + minor costs so setting aside 10% of your initial spend on formalizing is money well spent

3. Take on any outside investment from anybody - You need an ivnestment vehicle so the second you decide to raise $5,000 from your Uncle Larry it's time to open the LLC

I really like your idea of unifying projects in 1 LLC then spinning them on success. You can also create a unique DBA for each project and this is very effective.

Hope this helps.

Best, SS

It's really hard to give you proper advice without understanding what these side projects are or how many people use them.

It's all about managing risk and reward so it totally depends on how much you are charging, what the product or service is, and how many (and what type of) people are using it.

Forming an LLC that holds all of your side projects isn't a massive expense and it can actually make things a lot easier for you. If your LLC has a bank account and you fund it for expenses and take all revenue through it, accounting will be much easier than interlaced debits and credits in your personal bank account.

Skimping out on legal is a big turn off to investors as well so it depends on whether or not you are trying to grow any of these projects into businesses. LLCs are super flexible structures that can be easily modified later should you need to spin out a project into it's own company, change to C/S corp, or use a series LLC (not all 50 states recognize) to separate assets or liabilities.

Another thing to consider is your personal assets and risk. If you own a home, make good money, or have a sizable amount of assets, spending a few hundred or few thousand to protect them seems logical.

None of this is legal advice, I'm not an attorney.

You're on the right track. A couple of rules of thumb:

1. An LLC's liability protection kicks in when you start to deal with others.

2. For the first LLC especially, you should measure the value of what's at risk, not the 'profit' or value of the business.

In (the many) states where LLCs are cheap, it makes sense to put side projects into a container sooner, not later, especially if you have significant personal assets. Your personal assets are probably worth a few hundred bucks to protect, even if you don't have outside investment.

It's a more difficult question to decide when to split out a particular side project into its own LLC.

I've formed and run an sole member LLC, S Corp and C corp. Sometimes I get people asking me about forming a company to do EBay, Amazon FBA, and other side gigs. Here is basically what I tell anyone who asks (cliff notes version), off the top of my head:

1. If it's not making money, it's a hobby.

2. If it's making a little bit of money, don't form an business entity. Just do it as a sole proprietor - this is basically the easiest thing to do. Just open a separate bank account for the business and Schedule C on your tax return. Save ~25% of income in savings account for self employment taxes and taxes. Converting to an LLC, S Corp, etc., is always a possibility later.

3. Your choice of business entity will have consequences down the road that your attorney or accountant may not explain to you up front. For example, I did most of my consulting through an LLC on the advice of an accountant who convinced me to give up my S Corp. When my wife and I went to purchase our first house, they convinced me drop off of the mortgage application because they didn't like the fact that I was "self employed." If I had kept the S Corp, I would have W2 wage income and they wouldn't have batted an eye.

4. The rules regarding business entities vary state to state. Some states will allow a single member LLC and single owner S Corp; others may not. Make sure you understand your state laws and the taxes. Some states have an income tax; others have franchise tax. You can form the corporation in another state, but you will likely have to register as a foreign corporation in your state. For a few years my corporation was chartered in Delaware, and I would register in a state when I had business activity there.

5. The IRS has no sense of sympathy or humor when it comes to payroll taxes. State governments are even more fanatical about getting their money, on time. Penalties can be severe. I was depositing payroll taxes quarterly and was surprised when they wanted me to start depositing monthly. They notified me with a 17% penalty.

6. Understand that filing a tax return can trigger the requirement to keep filling out tax returns even if you don't owe anything. If you shut down the business, make sure you spend the time and be persistent in closing tax accounts or you will get notices for years. Don't trust it when a government employee says the account will automatically get closed.

7. Understand that with an S Corp or LLC you will have to do the business tax return first, before you do your own tax return. If you are an minority owner of a corp, make sure they get the tax returns done on time and you won't get surprised. Once you get surprised with a $20k tax bill...

8. In some cases a C corp can make sense, regardless of what everyone says.

9. Make sure you setup a proper retirement account and make contributions. This can payoff over the long term, even if you business isn't super profitable. Make it a priority.

I have plenty more, but that's a few thoughts.

I would like to reiterate point 6 as I made this mistake with a past business. I was filing the quartly sales tax reports with 0 dollar sales. THen I just stopped.

4 years later me and my partner get a letter from the state comptroller wanting to know why we hadn't been filing. We were looking at several grand in penalties. When we went to the audit thankfully we got an understanding auditor who was able to close the account retroactively and remove the penalties.

Lawyer here. But not your lawyer.

Anytime you have potential liability, you should form a separate legal entity and bank account. Look up "piercing the corporate veil." Also, depending on your income, a C Corp in Trump Era might save you about 40% on your taxes. Personal rate vs Corporate. So why not do that?

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