Incorporating yourself can provide benefits like protecting personal assets and separating personal and business finances. However, it also has costs like legal fees, accounting fees, and more paperwork.
Signs You Should Incorporate
Signs it could benefit you include:
- Business earns over $100k
- Want to take advantage of tax deferral
- Seeking investment capital
Incorporation also lends credibility, making companies appear more reliable and stable.
Incorporation Process
The process involves:
- Checking business name availability
- Filing incorporation documents
- Completing paperwork to operate
Weighing the Pros and Cons
Weigh the pros and cons to decide if it suits your situation. The protection and formality may benefit growing companies, while it might be an unnecessary hassle for early stage businesses. Evaluate based on your profitability, goals, and risk tolerance.
Incorporating a business has disadvantages to consider before making the choice. It takes longer and is more expensive to set up than other structures. Shareholders’ liability is limited to the amount invested. There’s the requirement to pay annual state franchise tax with little revenue in return. Extra paperwork like tax returns and annual reports is required. Shareholders must keep personal and corporate finances separate. Other various expenses will occur, such as for bank accounts.
Operating as a corporation, you’re not eligible for personal tax credits, so every dollar earned is taxed. Moreover, the business risks incurring losses or debts it cannot pay; incorporating provides some limited liability protection in these instances.
By creating a separate legal entity, you can potentially lose some control. Before incorporating, consider whether the potential tax disadvantages outweigh the benefits for your specific situation. For instance, a sole proprietor may claim credits that a corporation cannot.