The
Inside Story on Incorporation:
Is It Right For You?
Incorporation.
Thumbs up or thumbs down? It's an important decision, but how do you
decide? Recent TV and newspaper articles seem to favor incorporation or limited liability companies. Yet it
isn't right for every small business. It is a complex issue and the right answer
is highly individualized.
A
corporation or LLC is a legal entity with several of the same rights and obligations
that you have as an individual. Many people favor the corporate form
of business in order to protect their
personal assets from being taken to cover business debts. If the
business is successfully sued, then the corporation is liable, and generally
the shareholders are not. This is referred to as the "corporate veil." LLC's are heralded for their limited liability.
This does not guarantee that you won't be personally sued, nor does it avoid
your moral obligation to compensate people for losses caused by doing business
with your company. However, it can help shield you and your family from losing
everything you own.
Many
people set up an entity to provide a more
substantial image to their company. The marketplace
can be hesitant about doing business with a one person enterprise. The
"Inc." or "LLC" after a company's name adds substance. To build
on this
image, avoid using your name in the company's title. Joe Smith Enterprises,
Inc. shouts "I'm just Joe." Oak Bridge Enterprises, Inc. could
be any corporation and sounds much more solid than "Joe's" company.
A
popular reason for incorporating and requesting sub-chapter S status from the
Internal Revenue Service (IRS) is the potential
cost savings. A sole proprietor or partner is required
to pay both employer and employee Social Security or self employment tax on all net profits up
to certain limits. A shareholder in a sub-chapter S corporation only pays Social
Security and Medicare taxes on wages earned as an employee. The remainder
of the company profits are treated as a return on investment subject to income
tax but not FICA. This can offset the extra expense of filing corporate returns.
Also, corporations are audited by the IRS less often than sole proprietorships.
Most
of the disadvantages with
incorporating revolve around the extra paperwork
and additional costs. Like partnerships, corporations
must file a federal income tax return. When professionally prepared, these returns
can cost $600 and up depending on the complexity of the business income
and expenses, and the qualifications of your income tax preparer. This
price does not include preparation of accounting, books, or financial
statements. Currently the state of Florida charges a $150 annual filing
fee with a similar charge for LLCs. Most states charge an annual fee.
Shareholders
or members working for a res or sub-S corporation must be employees. This entails
monthly payroll tax deposits, quarterly reporting, and payment of unemployment
taxes. Payroll record keeping can be learned quickly but be cautious.
Failure to make payroll tax deposits correctly and timely is heavily penalized
by the IRS. But paperwork and payroll are readily handled by most, so
don't let either deter you from incorporating.
The
cost of incorporating a small business can run the gamut from a cheap $45 do-it-yourself
kit to $1000 - $1400 for an attorney. In between these choices, you can
obtain assistance from a Certified Public Accountant (CPA) for $700-$800, or
attend a seminar for $150-$300. There is a meaningful difference between the
services offered. Go to a professional for help on the
following items:
If
you have few expenses, low income, no employees, little liability exposure,
and no long term expectations of growth, then, save your money.
You will get little benefit from incorporating. But if you are in business
seriously, desire a solid image, expect to have employees, or fear the
results of being sued, consider incorporation or setting up a limited
liability company. It
may be one of the wisest business decisions you make.
Incorporation is more than just filing paperwork. Check
out our comprehensive incorporation package.
J.D. Sumter & Associates, Inc.
16910 South U.S. Hwy 441
Baylee Plaza - Suite 203
Summerfield, FL 34491
(352) 307-4366
