The Two Most Important Reasons To Incorporate Your Business

Posted Date: 2007-09-21 06:39, Pageview: 201

The Two Most Important Reasons To Incorporate Your Business

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I don't have any employees.
I don't have enough revenue.
I'm just starting out.
My initial capital is low.
I've been told not to.
I've heard it's too much paperwork.
It's too complicated.
You get the same deductions anyway.

These are a list of reasons many small business owners use when asked why they don't incorporate.

Most of these reasons have no merit when you look closely at the differences between running your

business as a sole proprietor or general partnership versus a Corporation or LLC (Limited Liability Company).

I have spoken to thousands of small business owners for the last 10 years who have heard advice from CPAs,

Attorneys, Friends, Family and others all on whether they should incorporate or not. There is a lot of bad advice

out there. Some of the reasons above, such as not having any employees, was one CPA's reason for one of our

clients not to incorporate. That particular client saved over $35,000 in federal taxes once they did incorporate.

I recommended they found a new CPA.

Here are, in my opinion, the two most important reasons to incorporate your business:

Asset-Protection - If anything, no matter what type of business you are in there is a potential for a lawsuit. I have heard people say that they don't operate a litigious type of company so they don't have to worry about it. The most common sources of lawsuits for small business owners are employees, customers and vendors. If you don't have any of those, you aren't in business.
Tax Savings - CPAs will debate one another on what a Corporation can write off that a Sole-Proprietorship can not. There is however one deduction that can not debate: self-employment tax on the owners of the business. If you are a shareholder of an S Corporation and work in the company you are an employee and a shareholder. You have to pay yourself a W2 wage and you get to take pass-through income as a shareholder. As the shareholder you can avoid the self-employment tax of 15.3% and only pay income tax on the profits.

These two reasons alone are significant enough for any small business owner to incorporate.

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