Q: I am very new to the travel business, and I have a few questions about whether certain legal formalities are really necessary at the outset or whether I can dispense with the formalities until I know that my business is going to be successful. Based on reading your Legal Briefs columns, I already know that I can dispense with getting an ARC appointment and a GDS contract. Let me ask my other questions one at a time.
Q: Is it really necessary for me to incorporate my business right away?
A: You take risks by operating as a sole proprietor for any period of time. First, your personal assets, such as your house and bank account, can be seized by creditors who get a judgment against you. Second, if you put your income and expenses on a Schedule C on your personal federal tax return, you are more than three times as likely to get audited by the IRS than if you incorporate or set up a limited liability company (LLC) and file a corporate tax return. Once you get audited, any travel expenses you claim will probably get disallowed.
Further, if you wait, you will have to file two tax returns: one for the part of the year during which you were a sole proprietor and one for the period after you set up your corporation or LLC. Finally, it is remarkably easy and cheap to set up your corporation or LLC if you are the only owner. For all these reasons, you should not wait.
Q: Is it really necessary to register as a seller of travel in the four states that have seller of travel registration requirements — California, Florida, Hawaii and Washington — before I start up, or can I wait awhile?
A: If you plan to sell travel to residents of those states, then the law requires you to register. That said, it is certainly true that many startups take a long time to register after they start up. Whether you can get away with not complying depends on where your clients are, where you work and the type of travel you are going to sell and how you are going to sell it.
Contrary to what some host agencies may tell you, you do not automatically qualify for an exemption from registration if you have a host that is registered. You and your host must meet all the requirements for exemption, and those requirements are different for each state.
Q: If I have a host agency, is it necessary to have a written contract with the host right away, or can I wait to sign the contract until I know I will be successful?
A: The IRS and many states require that independent contractors have a written contract. Otherwise, the relationship may get classified as one of employer and employee. Further, written contracts with hosts should provide you with many protections that you wouldn’t have without one, such as deadlines by which the host must pay you your commission split.
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