Whether you run your business out of your home, a large office park, or a motorhome, you’ve got to take all aspects of your business seriously, including the legal matters of incorporation. After all, your decisions surrounding incorporation can affect your exposure to liability and the taxes you pay.
But to back up a bit, you might be wondering why you need to incorporate in the first place.
Specific advantages vary based on each business’ unique set of circumstances, but general benefits typically fall in these categories:
- Liability/personal asset protection: Without incorporation, your own personal savings and property are at risk to settle any debts of the business. Once your business is a corporation or LLC, it becomes a separate legal entity. This means that the corporation (and not you) is responsible for all of its debts and liabilities. I know you don’t anticipate angering clients or defaulting on any payments. And most likely, you’ll never encounter this kind of trouble. But things do happen. And a legal business structure gives you peace of mind that your retirement savings won’t be wiped out by your business venture.
- Tax benefits:In many cases, corporate tax rates are lower than individual tax rates. And corporations and LLCs often qualify for additional tax benefits and deductions that aren’t available to individuals. Of course, specific circumstances vary, and you should consult with a CPA or tax advisor about your own particular tax situation.
I often say you don’t need mazes of cubicles for incorporating your business to make sense. But if you’re an entrepreneur who lives full-time on a yacht or motorhome, you know that your on-the-go lifestyle presents new challenges not experienced by your more rooted counterparts.
In terms of picking your state of incorporation, there are a few key things to keep in mind:
Can I have a legal address in one state, incorporate in another, and pursue business in other states? Generally speaking, most states will allow you to have a legal address in one state, incorporate in another state, and pursue your business in yet other states (as long as you qualify the business in those other states). However, there are a few states that will require the legal address for your business to be in the same state that you are incorporating or forming the LLC. Your attorney or legal document filing company can help you navigate all the ins and outs for your particular states.
What states are best to incorporate in? You may have noticed that Delaware and Nevada are two popular states for incorporation. And for good reason. Many larger corporations choose Delaware because it offers some of the most developed, flexible, and pro-business statutes in the country. And Nevada is increasingly becoming a popular choice for businesses due to its low filing fees, as well as the lack of state corporate income, franchise, and personal income taxes.
However, most small businesses never see the benefits from incorporating in these states, and end up with a lot more headaches and costs than they ever anticipated. As a general rule of thumb, I like to say that if a small corporation or LLC has less than 5 shareholders or members, it is best to incorporate in the state where the business has a physical presence.
In other words, a small business (whether it’s a corporation or an LLC), is best served by filing in its ‘home state’ where:
- It is physically located
- Property owned is located
- Employees reside
- Where shareholders have a physical (legal) address
I realize that for many of you operating out of a yacht or mobile home, the last criteria will be the most applicable — where your business holds a legal address.
As a small business owner, it makes more sense to focus your time on conducting a legitimate business, rather than trying to figure out how to hide your assets or avoid paying taxes. The amount of time, energy, and anxiety associated with the various maneuverings won’t be worth the savings you’ll get. And in many cases, you’ll just end up with added fees and paperwork for operating ‘out of state.’
There’s no reason to add more to your workload by trying to operate out of state. And while it’s common for the small business person to worry that he or she isn’t taking full advantage of all potential tax breaks, in this case, the simplest route of incorporating in your own state turns out to be best.
How should I incorporate? And should I choose an online legal filing service?
Too many entrepreneurs think they need a lawyer for this matter, when viable alternatives exist that can save significant dollars and be just as reliable. By working with a legal document filing service, you can represent yourself to create a legal business entity. In the eyes of the law and IRS, your business structure will be just as valid than if a high-priced attorney sent in the documents for you.
Of course, there’s a key difference that’s important to understand. A document filing service is exactly that… a document filing service. It’s not a substitute for an attorney, accountant or tax advisor. These service companies are prohibited from giving you specific legal or financial advice for your set of circumstances. If you have particularly complex business needs, you should retain your own expert counsel to help get you started.
However, in straightforward circumstances, most investors can make a sound decision about their legal setup. And believe it or not, when you call some document filing services, it’s possible to actually reach a live, knowledgeable person who’s well versed in the needs of a small business, even the mobile small business, and doesn’t follow a script.
Of course, when it comes to legal matters, I’ll be the first to say that trying to save a few dollars up front can end up costing you big in the long run. Trust your gut; if you feel like you need to bring in expert counsel, then, by all means, do so. Just remember that you are able to file for incorporation without an attorney, and this could be a very reasonable, and cost-effective, way to go.
As you journey through the process, be sure to take each stage seriously. CorpNet.com’s professional staff is here to assist you every step of the way… And once you know what you’re required to file, we can take care of the details for you!
Please feel free to reach out to me with any questions to firstname.lastname@example.org.