|I don't have any cool pictures of me visiting the lawyer...|
perhaps I should have brought him a little mug rug to thank him for his help, lol.
So I've been whining a lot lately about the legal and tax-related mumbo-jumbo that comes with setting up a small business. I started selling pdf sewing patterns about a week and a half ago, and my husband requested that I look into some form of liability protection, so that in case of the worst-case scenario, our house and cars do not get taken away. "Just Google it," he says.
Well, I admit that anything non-creative just makes me frown, and when I started looking into some of this stuff, I panicked and felt like I was trying to read French. So today, I went in search of some answers, and I'd like to share some of those with you here.
Disclaimer: I am not a lawyer. Anything contained in this blog post are just things I was told by a lawyer, and findings from on-line legal websites. I am not suggesting you do any of these things; if you need more information, check with your local government.
I wanted to talk about this on my blog because there seems to be a lot of confusion regarding this kind of issue, and there must be other people out there that have the same types of questions that I did. My viewpoint on this is from someone who has a business where you make some form of craft (in my case, it is intellectual property in the form of a pdf sewing pattern).
I live in Chicago, and the city of Chicago has a great resource called the Solution Station, which is available to small businesses. They have one-on-one guidance available 3 days a week, in 3 different areas (tax-related questions, legal advice, and how to obtain funding), and this service is free. I went on the legal day, because that is the area that I needed the most help with. I actually went downtown to City Hall, which is not the most fun thing in the world, being how there is no parking (unless you're prepared to pay at least $20). I didn't have to wait, and the person that helped me was really nice and didn't laugh at my stupid questions.
Basically, for someone that is the owner of the business and only employee (like I am), there are 2 main options in order to be protected from liability: an s-corp and an LLC (limited liability corporation). I would be considered a sole-proprietor, but that just means I am the only owner of the business. Both the s-corp and the LLC will protect you in case someone sues you, but as I understood, there were a couple of differences between the two. I found this nice little article about it that I could actually understand.
The lawyer that I talked to said that there were more requirements from the business owner, if they decided to use an s-corp. The example that he gave is that even though you might be the only employee, you would still be required to keep weekly (I think he said weekly) 'minutes', which would be a meeting among the shareholders. Mine would probably go something like this, "Sara, how's that pattern writing going?" "Hi Sara, it's going great! When do you want to do some advertising?" "Sara, I'm not sure...maybe in another month or two?" He said that this might sound ridiculous, but stressed that if all the requirements/paperwork of the s-corp were not accounted for, that you still could be sued, even though you had an s-corp.
The fees for setting up either will depend on your city. The fees for Chicago for an s-corp are $181.25 to start, and the fees for setting up an LLC are $500 to start (my friend has told me that in California, the fee is around $800). Despite the cost difference, I felt more comfortable in deciding to go with an LLC, because it sounded more flexible.
So, what else did I find out? Even though I would be a sole-proprietor, I would need to obtain a DBA (doing business as). This is basically the name that you call your business. I did a check online to see if my intended name was available, and it was, so I printed and filled out the form that was available on my county's website, and it will be signed by a notary public tomorrow. I had already applied for a business license, but the lawyer said that that would need to be changed over to the DBA name instead of my own name. He said all accounts used by the business would also need to be changed to the DBA name (website hosting, e-mail, bank account, any other accounts associated with the business). Once I obtain the DBA certificate in the mail, I will be able to apply for the LLC. There is a yearly fee for the LLC (my yearly fee after I first apply would be $250).
As a side mention, I had also read something online regarding liability and working from home...I asked the lawyer, since a room in our home is dedicated to my sewing (and my husband's computer), do I need to be concerned with anything regarding that (heating, electric, whatever) and the LLC? Because the business was being conducted at home, should I be worried about our home still being able to taken in the event that something did happen? He said that that would be getting a bit 'out there', but that if I used my car to drive to purchase supplies (say, at Joann Fabrics), that I should keep track of the mileage. I order most of my supplies online, so I'm not really worried about that, but I do pick up the odd thing at Joann's once in awhile.
In conclusion, even though the fee to set up an s-corp or an LLC may seem significant, especially to someone just starting out in a craft-related business, I think about how hard my husband and I have worked to have our own home. I can't even fathom what would have to happen for me to get sued over something I have created (does someone have the same purse strap configuration as me?? lol), but just because I can't imagine it, doesn't mean it can't ever happen. I'd rather just pay the yearly fee and have piece of mind.
Hopefully this has helped you! Again, like I said, please investigate this more thoroughly with your local government. I am still trying to get the tax stuff straightened out (hey, I only bought Quickbooks last week people, basically I installed it and put my name where they ask for it, haha), I will probably do another post talking about my experience with that. ;-)
I'm really looking forward to seeing in the comments of this post, if anyone else has anything to add, or a personal experience.
P.S. My overseas readers...I'm curious if your process is easier? Or more difficult?