On my list of Reasons to Incorporate or Form an LLC, #2 is limiting personal liability. If you are a Sole Proprietorship, there is basically no legal distinction between you and your business. If your business owes Bob’s Hardware money, you owe Bob’s Hardware money. That means that your house, your car, your iPod, your whatever – is at risk if your business has debts.

Corporations and Limited Liability Companies (LLCs) are separate legal entities. That means there is a difference between you owing money to Bob and your business owing money to Bob. If your LLC fails and files for bankrupty, your house and iPod is safe. As usual, there are exceptions:
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I forgot about another reason to form an LLC or corporation: Tax Audits. Here are some stats from 2004:

IRS Audit Rates
Sole Proprietors with income < $25k: 3.15%
Sole Proprietors with income $25-100k: 1.47%
S-Corporations (all): 0.19%
C-Corporations, assets under $250k – 0.18%

According to this small data set, sole props are 7 to 17 times more likely to be audited than corporations, and about 3 times more likely than indviduals without business income. Couldn’t find info for LLCs.

I’ve been reading LLC or Corporation?: How to Choose the Right Form For Your Business by Nolo Press, which writes a lot of do-it-yourself legal books aimed for the public. Some of the little details just make my head spin, but here are the main benefits of forming a corporation or limited liability company (LLC) for an individual:

1) More job opportunities. Many companies won’t hire an independent contractor unless they are an LLC or corporation. This is because they are afraid of the IRS classifying you as an employee later, and then charging them possibly years of back employment taxes.

2) Limited liability for business debts. As a sole proprietor, if your business goes under you are personally responsible for all the debts. That means your house, your car, and everything else you own can be taken away to pay off those debts. This doesn’t protect you from everything all the time, though.
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There has been a big jump in money-related blogs recently, and I would like to support that with my new free blog community – mBlogs.org (short for moneyBlogs). I’ve been sitting on this idea for months now, mostly because it won’t be very profitable considering the amount of work I’ll have to put into it. But I think if I don’t give it a try I’ll probably regret it too, so I spent most of today working on it.

If you’ve thought about starting your own money weblog to share tips or track your own financial progress, and would like to join a community that will help you do so and that is free, read on!
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As a follow-up to my Thinking Big post, sometimes my biggest problem is motivation. When you don’t have a boss or deadlines breathing down your neck, it’s easy just to sit back and slack off. As all the gurus say, you should surround yourself with inspirational and like-minded people.

My main inspiration is my wife. She has a respected job she likes, and works very hard at it. She supported me when I decided to go back to school, even though I’m sure it brought her no small amount of anxiety. Other inspirations include my parents and all the self-made people I know that made a great life out of very little.
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Not only do I want to retire early, I want to have a great life on the way there. Duh, right? What I’m trying to say is that I don’t really worry about money in the long-term anymore. My wife and I are educated, hard-working (well, I can be…), and aren’t too materialistic. I’m already unhealthily obsessed with money matters. We’ll be fine.

The key is to avoid complacency. To be totally clich?, I want to Think Big. I’ve been toying with the idea of not looking for a ‘real’ job when I graduate. No annual performance reviews. No paltry two weeks of vacation a year. No more ‘Casual Fridays’. Be completely self-employed. This begs the questions – How much do I need to make to go solo? And where am I at right now?
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I am still doing some part-time website consulting on the side, and it is simply amazing how many people are interested in hiring me. Almost every new person I casually meet with a small business, when I say what I do, I get “Hmm.. you do websites? Do you do <insert their business niche here> sites?” What is nice is that for some clients I can build up a nice steady stream of income after I set up the initial site, where I charge them a certain amount each month for hosting, site updates, and occasional support. I honestly think I could do very well with this, the only thing stopping me is my mediocre time management skills.

One thing I have learned that since I lose 50% to self-employment taxes, I have to make sure to make it worth my time. For example, say I charge $50 a month. If I end up spending an hour a week on that client, that’s 4 hours of work for only $25 take-home. Working for yourself is fun though.

I have been searching high and wide for a business checking account that offered both a physical presence nearby and decent interest rates. That is looking increasingly unlikely, but I did find nBank, a bank online which offers a Business Money Market account that allows limited check-writing and currently pays a healthy 4.52% APY with a $3,500 minimum. The rates also look to remain high as it is based on the 3-month T-Bill rate.

Of course, it may be too good to be true. Although nBank is FDIC insured, Bankrate.com gives it a ‘weak’ Safe & Sound rating of only 1 star (the lowest possible), and this memorandum details how it is both losing money and has “questionable asset quality”. Yeesh.

Recently I opened a business checking account, and also a private mailbox at a UPS Store. Bank of America even offered a $50 bonus in the branch. The box costs $15 a month. This will just about finish my 2006 Q1 goal of separating business and personal finances. Another reason why I am doing this is for my future endeavors – proper treatment will avoid the IRS treating them as hobbies and not businesses.

The mailbox will serve a couple of purposes. It will allow us to receive mail and UPS/Fedex packages even if we are not home, and prevent them from just leaving it on our doorstep or having to drive to their warehouses. Also, we can give out a business address that is not our home address. Finally, both the rental fees and the mileage to and from the mailbox will be a deductible business expense.

I am trying to separate my personal and business finances, so my first step was to get an Employer Identification Number (EIN), sometimes called a Tax ID. An EIN is used by the IRS to track businesses and takes the place of a Social Security Number in many areas. They are free, you can either apply online or over the phone. I chose the latter because that way you get it instantly.

I technically don’t need one, since I am not incorporated and currently don’t have any employees, but it allows me to separate my business finances by using it to open business bank accounts, business credit cards, and so forth. Also, now whenever I get paid via 1099s it will be through my new EIN.

2005 has come and gone, and it’s about time to worry about income taxes again. I had various 1099 income in 2005 from consulting, this blog, and freelancing activities. I’m very green to all of this self-employment stuff, so it’s all a bit overwhelming. Apparently, by default, I am in business as a sole proprietorship. Because I am running a business, I can get tax deductions from business expenses. This will help alleviate the 50% self-employment tax-bite I was pondering earlier. But my recordkeeping was so shabby I won’t get everything I could have. For example, I can deduct the cost of webhosting for this blog, but not any of the mileage driven to my consulting gigs.

I plan on being much more organized this year. For example, all mileage that I drive for freelancing will be logged carefully on a clipboard in my car. Also, I plan on opening business checking accounts to track self-employment income and business credit cards to track expenses.

Everyone who has does any freelancing or independent consulting will say DUH, but here are my thoughts on freelancing so far:

» Need to get better at estimating the time required to finish a job, including any hiccups that are bound to occur.
» Need to improve my contracts to outline time requirements and outline exactly what is and is not included.
» Need better metrics on proper pay rates. Don’t just try to undercut everyone. My time is valuable, and each job I take has to be worth it considering both pay and experience gained.
» Need to do more research on minimizing taxes.