When you start a business – whether you’re a jewelry maker selling your wares on Etsy, or a startup founder ready to break through to the next level – one of the first questions that arises is: should I incorporate as a business?
Most businesses begin as a sole proprietorship. If you don’t incorporate, you are, by default, a sole proprietor. Legally, that means that you and your business are not separate entities, wherein your business is taxed at the same rate as you are personally and, if your business is sued or carries debt, your personal assets are not protected.
Separating yourself from your business by incorporating or forming a Limited Liability Corporation (LLC) puts up safeguards and protects against losses from business liability. There are other advantages as well.
- Asset protection. As a sole proprietor or general partner, you are personally responsible for all business debts and obligations. That means that in any settlement or judgement against your business, you are liable and your personal assets such as your home, car, and personal savings are at risk. However, if you are incorporated as an LLC or corporation, any judgments or debts incurred by the company are the responsibility of the LLC or corporation, not its stakeholders.
- Increased credibility. Experts agree that adding “LLC” or “Inc.” after a company name lends credibility to the business and helps project a professional image. Vendors and customers are more likely to do business with an incorporated company.
- Tax advantages. Incorporating a business might lower your taxes, but it’s best to check with your accountant first. After all, incorporated businesses do have more leeway in deducting business expenses, including salaries.
- Funding opportunities. Lenders and investors prefer to work with incorporated businesses because they carry less risk than sole proprietorship. Incorporating also allows more room for growth with the sale of shares, or stocks.
How to Incorporate
Once you understand the reasons behind incorporating, the next step is determining the best business structure for your situation – LLC, C corporation, or S corporation.
- LLCs are the least complicated business structure. Filing as an LLC in your state requires minimal paper work. An LLC gives you limited liability so that your personal assets are protected. It allows for multiple owners and lets you file taxes on each owners’ individual tax returns instead of filing a corporate tax return.
- C Corporations are the most common type of incorporated businesses in the U.S. This structure allows for the largest growth because you can sell stock. C-corps also allow for an unlimited number of owners. One of the drawbacks is that C-corps require double taxation of corporate profits.
- S Corporation is not a business structure; it is a tax classification. Instead of filing quarterly taxes like C-corps, S-corps file annual taxes and not subject to double taxation through corporate and individual tax filings. S-corp owners must be U.S. citizens and the company may not exceed 100 stakeholders.
It’s important to consult with your accountant to understand all the tax implications before deciding on the right structure to incorporate your business.
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