I introduced my latest venture in My Latest Get Rich Slow Scheme: Gift Card Arbitrage and so far the business has been doing pretty well. Since I am making a profit (although small) by buying and selling gift cards, I will have to pay taxes on those profits at the end of the year, if not sooner. For this reason and several others, I decided to officially register the business through the state of Washington as a single-member LLC. Having a business entity to work under will make it easier for me to open business accounts as well as protect my personal assets from anything that could go wrong with the business. Below I’ll explain why I chose an LLC over a sole-proprietorship, how I registered the business, and the various advantages I have now that my business is official.
LLC vs. Sole Proprietorship
LLC’s and Sole Proprietorship’s both have advantages and disadvantages, but the primary differences that affected my gift card business were ease of formation and liability. With either one, my taxes would be handled exactly the same and I would retain full control of the company, so neither of those impacted my decision. The advantage of ease of formation goes to the sole proprietorship because you don’t even really have to form it at all, just start doing business and call yourself a sole proprietorship. The LLC on the other hand requires a little bit of paperwork and a cost to start and maintain. At least in the state of Washington, it can all be done online and probably only took about 10 minutes for me to read everything and fill out the form, so paperwork wasn’t a real disadvantage. The downside is that you have to pay $200 to form an LLC, and pay $71 annually to keep the business’s information up to date. Given my small profit margins, these are fairly significant fees for the business, but the LLC does offer additional benefits over the sole proprietorship.
The main advantage of the LLC is right in the name, “Limited Liability Company”. By forming the business as an LLC, my personal assets are protected from any trouble the company may get into. Now I don’t foresee any problems coming up, but I’d rather lean on the safe side, especially considering the assets I am currently trying to build in order to be financially independent by 40 years old. Under a sole proprietorship, myself and the business would be considered the same entity and any liability taken on by the company would also be taken on by my own personal assets. Once again, I don’t think this will happen and don’t foresee running into any issues, legal or otherwise, that would endanger the business or its assets, but for the same reason we buy insurance, you never know what could happen. $71/year seems like a small price to pay in order to operate the business with a little more confidence and eventually protect hundreds of thousands of dollars of my own personal assets.
As you know from the title of the post, I decided to pay the costs and form an LLC. The only decision left at that point was to come up with a name and after a week or so of thinking about it, we came up with Gift Card Ark. The name makes it pretty obvious what the business does, and is also a nice play on words based on my name and that story about the big boat. A requirement of an LLC is that you include either “Limited Liability Company” or “LLC” in the company’s name itself, so after a little bit of paperwork, Gift Card Ark LLC was born. I also registered the domain www.giftcardark.com just in case I ever plan to expand the business in some way that needs a website, but it currently just redirects to this blog.
After typing this article, I’ve decided the most important reason to choose an LLC is to avoid having to write or type “proprietorship” over and over again. Given the difficultly I’ve had spelling it correctly each time in the past few paragraphs, this consideration should not be taken lightly. 🙂
Advantages Of Having A Business
There’s probably many advantages that I’m not even aware of at this point since I just formed my first company, but here are a few I was considering when deciding to register the business.
- Business Bank Accounts – To my knowledge, you must have a registered business and a tax identification number to open a business account. There are a few signup bonuses for opening business bank accounts, but my primary motivation for wanting one is to separate my finances from the business’s.
- Business PayPal Account – As I talked about in Road Bump in the New Business: PayPal Limits eBay Gift Card Usage, PayPal limits eBay gift card usage per account, but under their terms and conditions, I am allowed to own both a personal and business account, essentially doubling my limit. This goes hand in hand with the business bank account in order to be a verified PayPal user in which the business name matches between PayPal and a checking account.
- Business Credit Cards – While it is possible to apply for and get business credit cards without having a registered business, being able to use an EIN (Employer tax id) instead of my social security number, and having an officially registered business should make the process much easier. My own experience applying for an Ink Plus card and being declined despite good credit and a good history with Chase seems to show that opening a business credit card might not be as easy as some claim it was in the past.
Aside from the a variety of business accounts that are now open to me, one of the coolest benefits is just being able to say I own a business. I’ve always had a little entrepreneurship in me when it comes to finding opportunities to make money, and being able to turn it into a legitimate business has been rewarding. It’s hard for me to believe that it has only been 2 and a half months since I bought my first gift card with intentions to resell, but I have no intentions of slowing down. It should be an interesting ride, and I’ll be sure to keep you up to date along the way.