Best Corporate Structure for Affiliates

So you've decided to become an affiliate or perhaps you've been an affiliate for a while and now things are taking off and want to know the who, what, where, when, and how of incorporation. Please note that most of the information here applies only to USA Affiliates.

This is a subject I have been studying for a while and finally I feel like I have the best answer for us affiliates.

Before I get into saying, "this corporation is best," I want to say there is no best, only what's best for you. Hopefully below this I will be able to lay out what is the best for you.

First, you need to determine where you are and where you want to be as an affiliate marketer. Where are you at? Are you making a few hundred a month, a few thousand, what? This is important for a few reasons.

Corporate And Business Structures
While you think of this, let's talk about the different types of corporations and business structures that you will be able to use.

Sole Proprietors
Most people reading this are probably going to be Sole Proprietors. All the affiliate marketing checks are sent directly to them or a doing business as name. This is fine when you're first starting out but eventually as you grow you're going to need something better. The sole proprietor ship has pass through income which means all income generated is "passed through" directly to the owner.

Limited Liability Company
The next structure that some affiliates choose is the LLC or limited liability company. The LLC can also have pass through income when there is a single owner meaning all profits can be passed on directly to you. The benefits to an LLC is that it's very simple to run. All the normal downsides to a corporation are not really there in an LLC (no corporate minutes, no double taxation, etc). There are many of the upsides of a corporation such as Limited Liability (versus the unlimited liability of a sole proprietorship).

The things you want to look out for in an LLC is to keep your personal and corporate finances separate. When you want to take some money out of the company, write a corporate check to yourself. If you tap into the corporate money for person uses you do a big no no called piercing the corporate veil. This means all that great limited liability you had previously becomes useless. If someone sues you they can get to your personal assets.

So this LLC sounds so great why would anyone choose something else? Well I'll get to that in a bit.

S Corporation
The next structure that many affiliates use is an S-Corp. The S Corp is a great structure for those who are generating a lot of money and I'll explain why towards the latter part of this post. The nice thing about the S-Corp is that it has the limited liability and does not have double taxation like a standard C-Corp. Another great thing about an S-Corp is that you can convert it to a C-Corp very easily. Literally one small form unchecking the S election can change your corporation into a C-Corp. Awesome!

If you ever wanted to take an LLC and make it a C-Corp you're looking at one expensive lawyer bill! You have to merge the LLC into the C-Corp with some long drawn out contracts and such. Not my idea of fun!

The downsides to an S-Corp are that you must keep the corporate minutes and some of the normal formalities which just are not fun.

The main upside to the S Corp however is that you can save a TON of tax money. Have I sparked your interest yet?

With a normal Pass through income company such as a Sole Prop or a LLC, you pay income tax on all profit and self employment tax. This self employment tax is just over 15%. Ouch.

With the S-Corporation structure your corporation pays you an annual salary. If at the end of the year you can pay yourself remaining income via a large dividend. It might not seem any different but here is the great part. The large dividend does not have the 15.3% self employment tax. Thus you can save a lot of extra tax money, legally!

This salary you are paid with must be a normal wage for what you're doing. You can check salary.com or some other site to see what a "normal salary" would be for your line of work.

This salary is a pain because you must use a payroll service that takes out all the standard taxes that a normal business employee has taken out when getting their check.

Payroll Services
Here is a neat little trick though... Many of the larger banks offer free payroll service if all the employees are paid through direct deposit to the same bank.

For example: if you have your corporate and personal bank account at Bank of America. If you're the only employee of your S-Corp you can get the whole payroll service done for you for free. Each month you will be paid via direct deposit from your corporate bank account.

What's even greater about this... MOST support quickbooks file formats so you can simply upload and go!

S-Corporation Example
Here is a great example I saw while researching. I couldn't find it again so this is from memory.
There was a lawyer who through his S corporation made $26,400,000 in one year. Through the S Corp, the lawyer was paid an annual salary of $400,000. At the end of the year, the remaining $26 million was paid as a dividend. This means that instead of paying the 15.3% self employment tax on the entire $26,400,000 he paid the extra 15.3% on the $400,000. Doing this saved him over $750,000 in taxes!

The $750,000 may not sound like much in comparison to 26 million but that's 3 quarters of a million dollars saved!

So which corporate structure is best for your affiliate business?
I think this question can be answered by one major question. How much are you earning?

If you're earning a standard salary through your affiliate marketing business, you really are only going to see downsides if you use an S-Corp. Go with a standard LLC and you'll reap all the benefits of being protected without all the corporate hassles.

If you're earning a bit more than a standard salary, I would suggest using the S corporate structure. This will save you a lot of money in the long run.

Obviously, you're going to want to talk to a lawyer or tax accountant before doing anything.

So where and how do you incorporate?

You can use a lawyer and you should expect to pay at least in the low $x,xxx range after everything is all done.

Another alternative which is cheaper is to use a service such as legalzoom.com or incnow.com. Generally these sites do a pretty good job specially if you don't really know what you're doing.

Lastly, you can get all the paper work needed from websites. This is the cheapest alternative but takes the most time and requires the most knowledge.

What did I go with?
I went with a S-Corporation because I earn a bit more than a salary through affiliate marketing.

Legal Information Is Not Legal Advice
This post provides information about the law designed to help users safely cope with their own legal needs. But legal information is not the same as legal advice -- the application of law to an individual's specific circumstances. Although I went to great lengths to make sure this information is accurate and useful, I recommend you consult a lawyer if you want professional assurance that our information, and your interpretation of it, is appropriate to your particular situation.