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Should I incorporate my business? |
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There are many great benefits to incorporating your business.
One primary benefit is LIMITED LIABILITY. If you maintain the corporation's legal status properly, and avoid personally guaranteeing the corporation's obligations, your corporation, and not you, would be solely responsible for its own obligations.
The single most important reason people use the corporate form of doing business is to safeguard the personal assets of the owners -- the shareholders (or stockholders) of the corporation -- against potential claims of creditors. Sole proprietors and general partners in a partnership are personally liable for all debts and obligations of the business, such as loans, accounts payable, and defective products. Stockholders typically are not liable for ordinary debts and obligations.
Other potential benefits of incorporating (even for one-person operations):
Corporate identity: the sense of image, stability, sophistication, credibility, and permanence results from incorporating, no matter if you start with one person or several.
Raising capital: you can issue stock to investors to raise capital which may be more advantageous than borrowing and making interest payments. A corporation can also issue and sell additional stock.
Continuous life: a corporation can survive its founders, provided it complies with ongoing state and federal paperwork and pays the annual filing fees.
Its shares can be transferred. Stock often can be pledged, sold, given away, used as security, or given as bonuses.
Tax savings: corporations are taxed at a lower rate than individuals. Also, they can own shares in another corporation and receive corporate dividends 80% tax-free.
Of course every case is different, so it’s wise to review each case differently. But as a general rule it’s usually best to wait until your business is profitable before making the transition from sole-proprietorship to incorporation. Below are a few other issues you will need to consider before making the transition:
The incorporation process can be expensive if you use an attorney or your local CPA firm. It’s not unusual to pay in excess of $1,000. You can also find companies online that will incorporate your business for around $600.
When you incorporate your business you are also expected to have your financial records maintained on a monthly basis by an accountant or you can maintain themselves if you not what you are doing. The reason you need to have your records maintained on a monthly basis is because you may be subject to Estimated Quarterly Taxes and your accountant will have to make this calculation on a monthly and/or quarterly basis.
When you incorporate your business you are no longer the owner. You now become a corporate officer (president, CEO, etc) and a shareholder. As a result you will not be able to withdraw funds from the company as freely as you were allowed to when you were a sole- proprietor. You will need to keep and maintain good records of all disbursements of cash. At some point you will need to consider paying yourself a salary and using a payroll service to calculate your payroll withholdings and to prepare and file your government payroll reports.
As you can see there is more to the transition from sole-proprietorship to incorporation than a one-time setup fee. The transition requires a very serious commitment to record keeping and the financial side of your business. We do not recommend making the transition if you are not serious about treating your business like a business. Williams Global can help simply the transition and ensure that you remain in compliance with the IRS. |
Business Taxes