Should I Operate as a Sole Proprietor or a Corporation?
As a small business owner, there were a lot of decisions you considered when you started your business, from what services to offer and where your business would be located, to what color your logo should be and what font you’ll use. You also had to choose what kind of entity your business would be, and for many first-time business owners, opening shop as a sole proprietor seems like the easiest choice to get started.
But if you’re wondering how your selected business entity affects your taxes and income, it’s a good idea to consider converting your business to a corporation.
In this week’s blog, I’m breaking down the benefits of incorporating your business and considerations for the best time of the year to make the switch.
Make a Name for Yourself, Literally
If you recently started a business, you may think you’re not earning enough money to justify organizing your business as a corporation. But, there’s a psychological benefit to incorporating your business even before you need the liability and tax benefits, which is that you are establishing yourself as a business, and making a statement to yourself, future clients, and the universe that you are a business owner — and that is a critical part of your future success.
Incorporating your business not only gives you certain benefits that sole proprietors don’t get to enjoy, but it also helps customers, investors, and associates take you seriously as a company. People are more likely to get involved with companies they trust, and even if your company is new, being incorporated gives the impression that your company is built on a solid foundation.
Incorporating is also a great way to light the fire under your own feet to learn all that you can about the benefits and tools available to you as a corporation, as well as the requirements for maintaining a corporation the right way. Even if your business is only made up of a few people, having an official corporation designation will let the world know that you’re serious about your business, which will support your business’s future growth.
Protect Your Money and Home From Debts or Lawsuits Against Your Business
As a sole proprietor, you literally put everything you own on the line for your business, and I don’t just mean your hard work and dedication. As a sole proprietor, you are personally responsible for any accidents or liabilities that occur at your business. And if you’re sued because of an injury or a broken contract, your personal savings and even your home are at risk.
When you own your business as a corporation, you can take out loans and conduct business in your business’s name rather than your own. Incorporating your business and keeping your business’s assets separate from your personal assets limits your liability for any debts or lawsuits your business faces. As a corporation, creditors, clients, and other sources of potential lawsuits can go after the business’s assets, but not your personal assets, so long as you keep your business’s finances separate from your own.
Save Money on Taxes and Decrease Audit Risk
Another perk of running your business as a corporation is the tax treatment. Especially if you elect to be treated as an S Corporation (the most popular corporation type for small businesses), you’ll benefit from an ability to reduce income tax by paying yourself a reasonable salary from your business (which is subject to payroll tax) and taking owner’s draws from the business, which are not subject to payroll taxes.
Plus, while we cannot guarantee this, we understand that you are significantly less likely to be audited by the IRS as a corporation than as a sole proprietor. In fact, we’ve heard that a sole proprietor is three times more likely to be audited! That’s because Uncle Sam is more suspicious of sole proprietors who might find it easier to brush income under the rug compared to more regulated corporations.
Take Steps Now to Incorporate in January
If you’re thinking of incorporating your business, the best time to do so may be next January, depending on what your revenue will be this year. While it seem strange to be thinking about January in the middle of Summer, if you’re thinking of incorporating your business, the best thing to do is prepare now so you don’t have to rush come the end of the year, and so you can begin enjoying the psychological benefits of professionalizing your business now, even if you do not incorporate until January.
What you can do now is to begin preparing in advance by thinking through the roles you want in your company and the necessary documents you’ll need to make informed decisions, such as creating or updating your current profit and loss statements and business plan.
Then, work with us to organize the other pieces every well-organized corporation needs, such as your Articles of Incorporation, bylaws, and employee handbook. Incorporation takes some legwork, but creating your corporation the right way from the start will make the transition smooth and easy so you can do what you do best – run your business!
If you want to minimize your liability and position your business for major growth, begin by sitting down with us. As your Personal Family Lawyer® firm, we can set up your business incorporation and establish a sound Legal, Insurance, Financial, and Tax system to support your business’s future success.