Taking care of the legal filings. Photo by dctim, Creative Commons License.
I am starting a new public accessible prototyping lab in Huntsville, Alabama, called MindGear Labs based on the fab lab model. I’ve dreamed of becoming an entrepreneur and have done a fair amount of research on the topic. But this is my first attempt at starting a business. Here is where I document weekly my mistakes and successes in creating a business from the ground up.
I finally, finally made MindGear official last week. There now is an entity called MindGear Labs, LLC. That’s the good news. I’ll get to the bad news in a minute.
A while back a reader asked me to go into the details of how to incorporate a business. I’m going to talk about my experience and thought process here. But you should not take anything I say as advice on how to incorporate your business. Frankly there are far better resources out there that will educate you on the options. Also my information is specific to Huntsville, Alabama. If you’re starting something anywhere else then the rules will be different. And if you are in Huntsville, remember I’m not an attorney or CPA or anyone you should be taking advice from. </disclaimer>
Basically I saw four major topics surrounding how I should organize MindGear. First was the paperwork. What was going to be required for the initial filing and what was going to be filed every year? Second was the liability issue. Did I want to create a separate entity so if someone decides to sue MindGear they can’t come after my personal assets? (Not that I have much in personal assets right now; they’ve mostly been liquidated to fund MindGear.) Third was how would I eventually extract funds from the business. Finally there were issues around involving other investors. In the future how would I allow others to buy ownership of MindGear or buy the company outright?
I eventually settled on creating an LLC (Limited Liability Company) Subchapter S. The LLC seemed to have the right tradeoff on paperwork. A corporation and LLC require articles of incorporation, or articles of organization for the LLC. (The terminology is slightly different for corporations and LLCs. For instance several folks have referred to me as MindGear’s member or owning member.) I believe that if I had filed for a sole proprietorship or partnership then I would not have needed these articles, but then I would not have the liability shield either. I’ve been told that there are several places on the internet where you can make the filing for around $200. I chose to use an attorney because I know I’ll have other work for him to do (trademark research, setting up membership agreements, etc.) and wanted to establish a relationship. Also in one of these many classes my girlfriend and I have been attending they’ve always advised to use the attorney. But several professionals have pointed me toward the websites too.
The Subchapter S addresses how I will handle any net income. I’ve generally read about the S and C options in regards to corporations but apparently in Alabama they apply to LLCs as well. It may be that S and C options apply to LLCs in other states as well. In any case an S corporation means that I’ll declare any net income on my personal taxes each year. If I had organized as a C corporation then I would pay corporate income tax and then pay tax again personally on any dividends I paid myself, known as the dreaded double taxation. At some point it becomes more tax efficient to be a subchapter C. I’m not sure when that is, but I believe it’s when an owner is taking so much money out of the business that it drives him into the top personal tax rate. Sounds like a nice problem to have.
One of the things I haven’t seen in the books but that my accountant has stressed to me is how the IRS treats subchapter S corporations. Owners are supposed to pay themselves like they would any other employee before paying any disbursements. An owner would rather pay the disbursement because that would just be subject to income tax, but employee pay means paying social security, medicare, workman’s comp, etc. Those taxes are roughly 15% when totaled up so it’s a decent chunk of change. However I don’t have to pay myself if I don’t show a profit. So I find that I should start tracking my time so that in the off chance I show a profit this year I can properly pay myself. I’m the owner and yet I still have to punch the clock. Sigh. Interestingly I’m supposed to track my time so I only pay myself what I would pay someone else to do the same job. So if I’m doing manager duties then I pay one hourly rate, if I’m running the cash register then I’d pay myself a lower rate. Hmm, I wonder what I should pay myself for writing blog articles?
The final issue involves including other people in ownership. Right now I’m the only owner. But there could come a time when I might want to allow equity investing, that is, people give money to take part ownership. Several of these business books have mentioned that you shouldn’t start a business without having an exit strategy. And most exit strategies involve selling the business to someone else. I have to admit I have not given exit strategies much thought. I’d be very happy right now to just be open. Corporations tend to be easier to allow other owners. They have more extensive agreements on how each owner is going to see how the business is doing, what rights and responsibilities each owner would have, etc. But then that requires a bunch more paperwork as well. I can reincorporate later if I have the happy problem of letting others invest in MindGear.
I’ve left off a lot of stuff off here, so maybe this needs to be a two – parter. Oh, and here is the bad news. It looks like the deal will fall through for the space I was going to rent. That’s unfortunate after all that work laying out the store, but it’s also an opportunity to find an even better space. I’ve gotten more than a few e-mails from Huntsvillians following this series. Let me ask all of you to e-mail me what parts of town you’d like to see MindGear open. I’ve been looking around the Research Park area but this is a good opportunity to find out if I’m in the right area. I’ll be working with a corporate real estate agent this week, so I hope to hear from you soon. Thanks!
