When to Incorporate Your Business
Did you know that your business is twice as likely to be audited as a Sole Proprietor compared to a S-Corporation or Partnership? (Source)
Starting a business can be exciting, life-fulfilling, and even nerve-wrecking. Many business owners test the waters by using a Sole Proprietor entity. Things are going well, you have learned a lot, and you’re ready to take the business to the next level. We will cover when and how to get started, as well as important factors that can impact your business.
The Questions You Need To Ask Yourself
Structuring your business beyond a Sole Proprietorship comes with a number of benefits as well as some costs. It’s important to ask yourself the following questions:
Is this business a long-term entity instead of a side hustle?
A new entity type can set your business on the right path. They are generally more structured and help you realize that you are running a professional business to the likes of Coca-Cola or Starbucks.
Your business is ready for growth and you want to be ready for the challenges ahead. You can hire employees and subcontractors securely instead of handing out your social security number. You can attract investors and take advantage of tax benefits unique to certain entity types.
Do I need additional legal protection to separate my personal assets from business activity?
A large and seemingly invisible benefit to selecting a new entity type is the corporate veil of protection. This protection means that as long as you operate your business as a separate entity from yourself, you can help limit the ability for lawsuits to go after your personal assets such as your home or vehicle.
We call this an invisible benefit because no one goes into business expecting a lawsuit but it does happen. Incorporating can be incredibly important should that day ever come. As the saying goes, “Hope for the best, prepare for the worst.”
Can I afford the additional costs that come with a different entity type?
All good things come with a cost. Some of the costs are straightforward. You usually need to pay your state to register as well as an annual filing fee. You will need to hire an attorney to prepare your by-laws and formal agreements.
You may be required to file a separate tax return and even process payroll, which would include any taxes and processing fees necessary. You may even need to reprint marketing material and letterhead to match any required changes. It’s important to go in well-informed about these additional expenses so you are not caught off guard.
If you answer “yes” to any of these questions means you should consider incorporating your business.
Your Next Steps
Once you have made the decision to create a new entity, you are ready to begin the process. In general, you will need to follow these steps:
Determine an entity type
The type of entity you pick will structure the way your business is run. It’s important to select a type that works for your future goals as well as meeting your personal needs. After all, that’s what starting a business is about.
Consider your book basis
You can choose either Cash Basis or Accrual Basis. This will also have a large impact on your business and how your taxes will be calculated.
Register with the state
You will need to register your new business with the secretary of state your business will reside. Depending on the entity type, you may need to apply for an Employer Identification Number (EIN) (don’t worry, it doesn’t mean you need to hire employees).
Prepare the necessary paperwork
Consult with an attorney to prepare your Articles of Organization/Incorporation and your Operating Agreement/Bylaws. It’s important to have an especially strong agreement if more than one owner exists. You may also need to file a Subchapter S election or select a fiscal year. Don’t forget to review your business plan.
Apply for any required licenses and permits
You may need local permission to operate your business and can be shut down if you are not maintaining the local registration requirements.
Open a bank account
You may have had a separate bank account beforehand. However, you need a new bank account in the new company’s name. A separate bank account from your personal one is required by most entity types.
Convert any listings to the new entity
You may have letterhead, emails, advertisements, and other documents that need updating to your new business name.
Review your needs and what makes the best sense for you. There is no “one shoe fits all” entity and rushing in can be a mistake. Speak to an accountant about your needs, goals, and determine what will work best for you and your business. The only thing left is to grow your business to the new heights it deserves.
We would love to help your business by providing our expert services in accounting, payroll, and tax. Contact us today to set up a free consultation.
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Level Books assumes no liability for actions taken in reliance upon the information contained herein.
