Making The Move To Incorporate Your Business – Knowing When And How To Get Started

Launching a new business or startup comes with a lot of things to get in place before you can open your doors (literally or figuratively). There is the funding for your startup, hiring the right team, and getting business compliance and legal regulations right. Whether you are a U.S. or non-U.S. citizen, incorporating your business is a decision many business owners need to make when deciding the level of risk they want to take on. The launch of small businesses is booming right now- half a million new businesses were launched in January 2021 alone, according to data from the Census Bureau. While many of them opted for sole proprietorships from the start, there are certain merits of incorporating your new business- if done at the right time and with the right approach.

Benefits Of Incorporating Your Business

Incorporation of your business often means business owners can enjoy tax advantages. Incorporations can capitalize on many different tax deductions every tax year-end. Some of the largest companies like Salesforce and FedEx have paid no federal taxes and taken advantage of tax breaks like the tax break for executive stock options or the research and experimentation tax break. However, your business can also enjoy the option of spreading out tax losses and deducting business expenses. This allows you to defer any taxes due if your business suffers a loss in its trading period.

Personally, incorporating your business allows you to protect yourself from creditors and future liabilities of the business. Your assets like your bank account, home, and car are kept separate from the business assets and your liability for losses is limited to your investment. This is handy if your business goes through tough times such as facing a legal lawsuit. Your tax obligations can also reduce if you choose to incorporate should you opt for dividends instead of a salary as remuneration. Therefore, incorporating your business can be handy in tax planning for both you and your business.

The Different Options For Incorporating Your Business

Now that you know the reasons why you should incorporate your business and when to recognize it is time, the next step is to focus on how to get business incorporation right. This starts with getting the right information on your business incorporation options. The type of incorporation structure you choose will depend on the kind of benefits you prioritize for your business. The 4 most common structures mentioned include S Corporations, C corporations, non-profit corporations, and Limited Liability Companies (LLCs). If you are after separation from the business, limited liability corporation (LLC) is the most common choice. This is largely due to their simpler financial structure, personal taxation, and flexibility of structures. To form an LLC you will need an article of incorporation and a registered agent. If you are wondering what is a registered agent for an LLC, it is simply a designated point of contact for federal tax notices and legal documents like summons, complaints, and lawsuit paperwork. Contrary to popular belief, you don’t need to hire a commercial agent either; you or a family member can be the LLC’s registered agent.

Those who choose to incorporate as a C corporation enjoy the perk of having their profits taxed independently of its shareholders. On the other hand, S Corporations pass all losses, income, and tax deductions to their shareholders. A noted drawback for C corporations: the ability to be double taxed. It is worthwhile keeping this in mind when you decide on an incorporation structure.

Knowing When It Is Time To Incorporate Your Business

While you do necessarily need to incorporate your business from the beginning, it is generally thought that the earlier, the better. Incorporating earlier means you get to experience the benefits of incorporation earlier on and in some cases, can boost your business’ brand image. Another tip for knowing when to incorporate your business: think about doing it before you sign on to any major business contracts. Incorporations are separate from their owners. This means you enjoy limited liability as to the business owner. In the event of a contract breach or legal action, you want to protect yourself (and your assets) from the financial ramifications.

So is incorporating your business the right move? Well, that depends on your preference and business goals. It does provide its own set of benefits like separation of personal and business assets along with lower tax rates. Whether it is the right move for your business at this time remains up to you.

This article has been scheduled in accordance with Socialnomics’ disclosure policy.