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I'm going to be working with some friends to start up a few websites. It won't always be the same group of people working on each site. Initially we expect to make no money on any of these sites. In fact, initially we expect we'll lose a little money since we'll need to spend a little money to get them up and running.

If and when any of the sites start making money, we'll split the income on a pre-agreed percentage with each person involved in the particular site that is earning money. so, we wont really have any employees. If and when the sites start making decent money, we might have the need to hire someone to do office work or whatnot.

Also, initially if the sites do start generating money, we'll probably just take all of the money and put it back into the sites (advertising, promotion etc).

I'm just wondering if i should worry about registering as an LLC or corp of some kind? Or if that's something I should consider when any of the sites start generating some money. I did at least look at the california sec of state website and the fees for filing aren't too bad - looks like it'll cost $100 or less. And if i should register, should i just grab the form from the Sect of State website, or should i use something like legal zoom, which will cost me an additional $100 on top of the filing fee.

Thanks

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5 Answers

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There are some hidden dangers in forming a corporation or LLC if you're not aware. Not only are you subject to an annual $800 franchise tax fee which is the case in California, you also have to file a Statement of Information or be subject to a $250 penalty and file annual income tax returns with the IRS, even if you're making no money. Failure to file these documents can result in your corporation being forfeited. Therefore, you should either seek legal advice or at least be aware of the consequences of forming such an entity before you start.

Note: This is not legal advice and does not create an attorney-client relationship.

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Well, the $800 fee alone is reason enough to me not to bother at this point. i don't see any reason to pay $800 so i can officially not make any money as a business :) – merk Jan 13 '11 at 6:19
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Each LLC operating in CA has to pay a minimum tax of $800. You should definitely factor that in. Unless you need liability protection or need to "look professional" in case you want to sell to large companies, in your situation, an LLC is unlikely to be a net win. IANAL, this is not legal advice, YMMV, and don't believe everything you read on the Internet (especially this reply). :)

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yeah the $800 annual fee is enough to keep me off from doing it for now. I'll come back and consider it when/if we start making some money. – merk Jan 13 '11 at 6:22
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I wouldn't bother getting another form, except what's provided by the Secretary of State. I am not familiar with setting up an LLC or corporation in California, but the initial organizational documents just generally require the entity's name, address, registered agent (if any), and maybe the name of the initial member or the like--i.e., nothing too difficult to figure out yourself. The state will reject it and send it back to you if you make certain mistakes, and you'll have the chance to make corrections.

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Corporations in CA are also subject to $800 minimum franchise tax, although they are granted a first-year exemption unlike LLCs.

It's more economical to start off with a contract between yourselves as partners unless liability is an issue in your business (which doesn't appear to be the case).

If you do decide to form a business entity, use the SecState's formation documents.

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Under CA law, as soon as you and your colleagues agreed to share profits, you created a general partnership (See "Beware the Unintended Partnership".) From the legal perspective, partnerships - especially those that are unintended and, thus, lack a written partnership agreement - are a bad idea because any partner can create unlimited personal liability for all of the other partners concerning partnership matters.

As concerns LLC vs. corporation, an LLC has lower compliance overhead and probably will suffice. Please see "Should I form an LLC or a corporation?".

Disclaimer: This post does not constitute legal advice and does not establish an attorney-client relationship.

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