Yes, I know. The majority (if not all) of you did not start a business because you love tax law and legal fine print. And in the flurry of supporting your current customers, working on adding to your client base, taking care of your home and family, and finding some downtime for yourself (remember downtime?), it’s all too easy to put off the question of incorporating your business.
But as a business owner, the day will come when you inevitably will have to address the legal aspects of your business – and the sooner the better. And, fortunately, the process can be relatively painless and hassle-free.
But let’s back up a bit. Why incorporate in the first place? I talk to countless small business owners and freelancers who consider themselves too small to worry about incorporation. After all, you don’t have mazes of cubicles…you may not even have any employees. However, incorporation can still be a smart idea even for the self-employed graphic designer or wedding planner. And here’s why:
- It protects your personal assets: Once your business is incorporated, it exists as a separate legal entity. This means that the corporation (and not you, the owner) is responsible for all of its debts and liabilities. Of course, most entrepreneurs don’t start their business expecting to anger clients or default on payments. And most likely, you won’t encounter such problems…however what if a copywriter unintentionally plagiarizes while working on a client’s website? What if your major client fails to pay, making it impossible for you to meet your own obligations? Without incorporation, you, as the owner, can be personally liable in these situations, and this puts your own personal savings, retirement, child’s college fund all at risk.
- It can offer tax benefits:For some individuals and businesses, incorporating can help lower the tax burden. For example, through incorporation, a self-employed contractor could reduce her federal and/or state income taxes by avoiding self-employment taxes. And corporations may be entitled to additional deductions not available to individuals. Of course, specific circumstances vary, and you should consult with a CPA on your particular tax situation.
- It can change your outlook: You’d be amazed at how much adding three little letters (Inc or LLC) after your company name can change the way you approach and perceive your business. And when you’re working from home, you need all the reminders you can get that you’re actually running a business. And, marketing studies have shown that adding Incorporated or LLC provides a sense of credibility and trust with current customers and potential customers.
After “Do I need to Incorporate?”, the next question I’m usually asked is “What business structure is right?” It’s a great question… one that I can’t necessarily answer here. But here’s a quick synopsis to get you on the right path:
- Limited Liability Company (LLC): The LLC is very hot among small businesses right now, and for good reason. It’s a hybrid of a partnership and corporation. It offers liability protection, but with minimal corporate formalities (in a Corporation, you have to pass resolutions and file minutes whenever you want to make a change to the company…this isn’t the case for an LLC). If you’re the sole owner of your business, the LLC is a great way to protect yourself without adding a lot of corporate bureaucracy. An LLC is considered a pass-through entity when it comes to federal income tax. This means the business itself is not taxed; rather, any business income or loss is reported on your own individual tax return.
- Corporation: The Corporation is the most common form of a for-profit corporate entity. There are actually two types: the S-Corporation and C-Corporation. Like the LLC, the S Corporation is also a pass-through entity for your income taxes. However, the C Corporation is not pass-through and for many small businesses, this can result in ‘double taxation’ where your Company is taxed, and then you’ll also be taxed on any profits/salary you draw from the business.
Unless your business is particularly complex, you should be able to incorporate your business or form an LLC online, without having to retain a business attorney. By working with a legal document filing service, you can represent yourself to create a legal business entity. And 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, when spare seconds seem in short supply, legal fine print and paperwork aren’t exactly high on your priority list. But getting your legal ducks in a row can give you peace of mind and help you avoid any legal pitfalls in years to come.