Business Planning Season 2017: Should You Incorporate Your Business?
The short answer is an emphatic, yes. There are many important reasons to incorporate or organize a business. One of the primary reasons is to insulate your personal assets from the debts of the business. If for any reason your business is sued, then your personal savings and other assets are protected from any judgment a court may render against your business. Other reasons to form a business include organizational and management needs, ease of administration, banking requirements and many others.
If you want legal advice on incorporating your business to save on taxes, or you need help understanding the Internal Revenue Code and what forms you need to complete as a business or individual to prevent tax controversies and audits, be sure to contact a business and tax attorney.
Below are some facts you should know before incorporating your business:
Incorporating Doesn’t Protect You from All Liability While incorporation does protect you and your assets from judgments and other liabilities against your business, business owners can still be held personally liable in certain situations. If you as the business owner sign a contract in your name, personally guarantee a loan, do not maintain corporate formalities, or commit a crime, then you will still be held personally liable. As a general rule for business owners, you should always sign on behalf of your business in your official capacity and avoid personal guarantees as best as possible.
Tax Differences Among Business Structures Another important aspect of forming a business is determining the optimal tax structure given your personal and business circumstances. Federal and state taxation vary depending on the structure under which you do business:
Sole Proprietorship: This business structure doesn’t offer liability protection and often invokes the highest rate of IRS audit. Do yourself a huge favor, invest in your future and form a business instead.
C Corporation: C corporations are subject to double taxation as the business is taxed on its profits and shareholders are then taxed on the distributions of profit they receive. However, C corporations do not have restrictions regarding who can own shares and this structure has long been a primary vehicle for larger companies.
S Corporation: Small businesses will typically opt for this structure to avoid double taxation, as profits are “passed through” and reported on personal tax returns of shareholders. However, S corporations have significant limits on who can own shares and an S corporation typically cannot have more than 100 shareholders. Other important restrictions include the fact that business owners must typically pay themselves a “reasonable salary” from an S corporation in the form of W-2 wages. Additionally, you should never own real estate directly in a S corporation.
Limited Liability Company (LLC): LLCs provide the best of all worlds since an LLC can be taxed three ways: as a partnership, as an S corporation or as a C corporation. Business owners can then determine what tax structure makes the most sense for them at the time, which, in many circumstances, can be altered later if circumstances change and the business owners would be better suited under a different tax arrangement. LLCs (taxed as partnerships) are also the preferred manner for holding real estate. Always seek legal counsel before you decide which option is best for you and your business.
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