[Cestlavie]

Hi,

Me and my friend are starting an urban streetwear company, and I handle the business part of it, and have found a lot of good info from your website. I figure it's time to start paying some of it back.

I am a CPA exam candidate with a background in accounting 3/4 passed, so I have an okay picture of what I am talking about. However, if you view this as a really big business decision you should consider talking to a professional CPA and a quick disclaimer that this advice should not be interpreted as a recommendation of any kind (since I am from California, where suing is the new form of the duel)

With that being said, as someone mentioned earlier, incorporating in general "protects your assets," but it's a bit more complicated. A corproation in regards to law is seen as a seperate entity, which means that whatever you put into it, imagine that that is a person. Now when you start a business you put things into the corproation, such as IP (designs), cash, accounts, etc... Say you infringe on a trademark and you are now in hot water. If someone decides to sue you, they can only sue you to the extent of the assets in the corporation, they cannot go after your personal assets. Now think of this as compared to a partnership, if they decide to sue you in a partnership, you are fully liable for all possible damages.

Therefore, before incorporating, you will have to decide for yourself what is your risk of litigation. Also there are more technical issues such as piercing the corporate veil, which means if you are using the corporate form to intentionally trick people, courts can rule that companies can go after your personal assets (I'm not too sure how often this is, and i doubt it happens much if at all with t-shirt companies)

Also another big consideration is taxation, I think which was also mentioned. There are two types of corporations S-Corps, and C-Corps. S-Corps are more or less passthroughs, which means all the income flows through to you, and C-corps function as their own entity which means that they are taxed, and then when profits are distributed to you, they are taxed again. The tax rules with this are probably beyond my ability to explain fully. But those are the two major issues with choosing to incorporate (along with the money and time spent with incorporation, the issues of course vary with each individual business).

Our business is doing business as a general partnership with a defined partnership agreement.

Hope that helped and wasn't just a big waste of time

 

[Cestlavie]

Hi Twinge,

I think all that would apply to your business is that a S-corp and C-corp have different ways of taxation. Other differences are not as applicable such as exclusion of foreign shareholders, the limits on shareholders, and things like that. You would want to go with a c instead of an S for those reasons, but i dont think you would have problems with the limit on number of shareholders which the last time i remember was 75, or the foreign shareholder problem.

There are also some tax differences (such as specific deductions), that I wouldnt be able to tell you, and would probably specific to your business. Your best bet would be to consult a CPA there, as there is a lot of research there for income tax minimization.

Sorry I couldnt be of more help

 

[Cestlavie]

Hi Error426,

To my knowledge only S-corps and LLCs are passthroughs as far as corporations. If the issue is limiting liability, you can also choose a LLP (Limited Liability Partnership) which is exactly what it says, but doesnt protect everyone in it. A LLP has general partners and limited partners, only limited partners are afforded protection. However, limited partners CANNOT participate in the managemnt of the company or it voids their limited liability, and as you are running your own company it would not change much as you would have to be a general partner. Where it would be applicable is if you have investors that dont want the risk of having to pay your debts. Then they join as a limited partner, and should you run into hot water, they only liable to as much as they put in. LLPs and all partnerships are passthroughs as well.

Also, in case some board members didn't know, a sole propreitorship means you can only be one person running the show, while a partnership is two or more.

The double taxation thing does sound bad, but it can be minimized with the help of a CPA as C-corps do get other deductions and benefits as well. What those deductions are would be specific to your business.

As for the hobby loophole, I really wouldn't be able to help you on that, sorry.