“Is it time to incorporate?” Entrepreneurs should be asking themselves this question as soon as they decide to start a business. Many of my clients have been advised by their accountant or tax advisor to remain a sole proprietor. While I’m not in a position to challenge that advice, here are some things to take into consideration when making the decision.
If not now, when?
My clients often say they don’t need to incorporate because they aren’t making any money. While I wholeheartedly agree with that, the answer is to go get your company making money. You have made the decision to become an entrepreneur, your first order of business is to make money. Assuming you chose this path to be successful, incorporating now will reflect your commitment to making it so.
You want to separate your assets from the business
Once your business is incorporated, you’re no longer personally liable for your business’ actions, and this includes obligations and debts related to the enterprise. Not only will this prevent issues such as your personal home or assets being threatened by business debts, it also comes into play with new product development. Should your company’s new service product come under legal fire, your personal assets can’t be targeted if someone takes legal action against your business.
Make sure your corporation is in compliance with the appropriate documentation to stay fully protected.
Tax Savings!! – Its a no-brainer
Corporations are not taxed the same way as individuals. Individuals get taxed on the income they make while corporations get taxed on income after expenses. For example, if you make $100,000 a year and are in the 25% tax bracket you would pay $25,000 in taxes on that income. If you are incorporated, make $100,000 and have $40,000 in expenses, you would pay 25% tax on $60,000 or $15,000. Wow you just put $10,000 in your pocket.
As a corporation there are hundreds of tax deductions you can take advantage of that are not available to the sole proprietor. To learn more check out Lower Your Taxes Big Time by Sandy Botkin or Incorporate and Grow Rich! by Diane Kennedy. Both are great resources to learn more about the advantages of incorporating.
It adds credibility
You’ve just started your business and you walk into a networking event with a room full of prospective clients. You introduce yourself, Hi, “I’m Janet Fish with Breakaway Enterprises”, you hand them a card with your business name and logo on it. Your email address is firstname.lastname@example.org on it. Not email@example.com. Fair or not, the impression is your established, you’ve got a COMPANY, whether its 2 days old or 10 years old.
Having a business will get you much further with partners, creditors, vendors and customers. Impressions are important. As if there aren’t enough great reasons to incorporate, this is a significant, if not tangible one.
You’re ready to raise capital
As noted by law firm Farrell Fritz, you can’t make any public stock offering unless your business is a corporation. Even if you’re not planning on issuing stock to raise capital just yet, you may be thinking about going to a bank for a business loan. Financial institutions would generally rather do business with a corporate entity than an individual.
It’s time to get incorporated, whats the next step? Consult with an entity specialist before even thinking about doing it on your own. Can you save money doing it online? Yes, and you can also make costly mistakes without experienced professional advice. Most likely you will only incorporate once, make sure it’s done correctly.