Typically, the process of incorporating your business is a time-consuming one. From obtaining an EIN to filing articles of incorporation with the state you are incorporating in, there are numerous steps that must be completed before your company can officially become incorporated. There are many reasons why it may make sense to incorporate your business rather than remain a sole proprietorship or partnership.
Here are just a few reasons why incorporating your business can be advantageous:
You have recently made an acquisition or merger with another business, and you want to ensure that the acquired company's liabilities do not become your own.
If you have employees, being incorporated can help protect yourself from potential lawsuits related to any actions committed by your employees. For example, if an employee is involved in a car accident while on the job, you could potentially be held liable for lost wages or other damages related to the accident even if it was not your fault. If that same accident occurred while the individual was at home and did not relate to work activities, there would likely be no liability on your part. Additionally, with employees come numerous required filings, including W-2s and payroll taxes. As a sole proprietor, you would be solely responsible for these filings – but as a corporation you can assign specific tasks to different employees based upon their skillset and training.
If you have a large amount of personal wealth invested in your business, incorporating can ensure that this wealth is protected in the event of a lawsuit against your company.
If you are planning on expanding your business into new locations or taking out large loans to fund growth, being incorporated can help protect all the locations and equipment that you own as a business.
You want to ensure that certain family members or business partners do not have access to certain financial accounts in the event of your death. In the absence of a will, state law dictates who is responsible for any debts that may be left behind. By incorporating your business, you can restrict ownership access to corporate bank accounts and other valuable property by shareholders only if specific conditions are met.
There are less formalities involved with incorporating a business rather than creating an LLP. For example, if you wanted to create an LLP (limited liability partnership) or LLLP (limited liability limited partnership), you would first need to determine which state your company is organized in and then ensure that the LLP/LLLP qualifications are met by state law. This could require filing additional paperwork or taking legal advice to ensure compliance with state law, which can increase overall planning costs.
If you are working on a project that requires multiple signatories, being incorporated can help expedite financial transactions by allowing more parties access to the appropriate accounts. Also, incorporating your business makes it easier for investors or lenders to transfer funds.
Additional costs (and potential tax benefits) might be available when incorporating your business, depending on the state you are incorporating in. If you are considering incorporation or want to learn more about how it could benefit your company, please contact us today . We would be happy to answer any questions you may have and provide you with a free consultation.
Regardless of your business type, it is important to be aware of and plan for potential risks and liabilities. If incorporating your company would benefit your business in any way, please contact us . We offer a full range of corporate law services that can help you protect your company's assets and long-term goals.
Tax Advantages:
C corporations are required by law to pay corporate income taxes on their net taxable incomes, but they can deduct many state taxes in arriving at their taxable incomes. This means that C corporations are allowed to subtract certain expenses from their taxable incomes, including interest on debts and salaries paid to employees. Thus, the corporation is not taxed on this portion of its income if it has already been taxed at the personal level by employees or other individuals.
The following items are tax-deductible expenses that can be taken on the individual income taxes of shareholders who are employees of the company:
However, S-corporations are not allowed to take any deductions on their taxable incomes that were not also taken by the shareholders who earned the income in the first place. The following are examples of expenses that can be deducted when earned by an individual but not when paid by an S-corporation:
Corporations are allowed to reduce taxable income by the dividends they pay out to shareholders, but only C corporations are allowed to pass these dividends on as tax write-offs. However, if an S-corporation shareholder works at the corporation, he or she must be paid a salary for the work, and this salary is not deductible to the S-corporation.
In general, an S corporation pays fewer taxes than a C corporation , because it avoids double taxation on profits at both the corporate and shareholder level. The following are additional tax precautions that should be considered by any taxpayer planning to incorporate:
The business form of your company must be determined carefully before incorporating. For example, an S corporation may not be the best choice if one of its goals is to minimize taxes by paying only a small salary to shareholders (who might then owe little or no income tax on their dividends). This is because an S corporation pays taxes on its net taxable income before distributing it to shareholders, and any salary paid to a shareholder will be taxed at the individual level.
Be aware of the corporate formalities required by your state such as holding annual shareholder meetings and keeping minutes of all board and shareholder actions. These formalities ensure that you retain the limited liability protection of incorporating only if you take care of the necessary paperwork.
State corporate income taxes should be your last concern. Instead, focus on federal taxes, since these are the ones that apply to most small businesses. Depending on which state you live in and its taxation rules, incorporating may or may not lower your state taxes . If you plan to do business in another state , incorporation will not necessarily reduce your state taxes.
When you build up a sizable amount of savings, it might be wise to consider incorporating as a C corporation , because profits left in the company are taxed at lower rates than personal income . If you plan on working for the company during retirement, however, an S corporation is probably better because distributions are taxed as dividends, which may be taxed at lower capital gains rates.
In order to get the greatest tax benefit from your business, you should consider incorporating for tax purposes, but make sure to determine your specific situation before beginning this or any other process. For more information about corporations and other business structures consult a CPA or other professional specializing in small businesses.
