What to do before setting up a corporation

An easy 5-step guideline to successfully incorporate your business in 2021

Whether you’ve been in business for a while or you’re a start-up, you may be considering incorporation or another form of entity, besides operating as a sole proprietorship.

A sole proprietorship is the simplest form of business entity, and it gets its name from you being the single (or “sole”) person who’s doing business. This type of business is done either under your name, or an assumed name registered with your county recorder.

Before deciding on a different business entity, there are a few things to consider:

  • If significant liability protection will be required
  • If there is, or will be, more than one owner or shareholder
  • If the cost is justified
  • Where you plan to incorporate your business
  • Your net income vs. cost savings

Do You Require Significant Liability Protection:

This is something you will need to discuss with an attorney but, both a corporation and an LLC may provide you with some form of limited liability.

Is There, Or Will There Be, More Than One Owner Or Shareholder:

The second simplest business entity is a general partnership. It’s simply two or more persons or entities operating similarly to a sole proprietorship. All partners have the same rights to transact business and share in the income and expenses of the entity according to a partnership agreement.

A corporation can be a more formal way for more than one owner to operate a business but, is also more restrictive in the way income and expenses are shared.

Is The Cost Justified:

It costs money to incorporate a business or form an LLC. Depending on the level of assistance required, expect to spend at least $500 for setup and filing fees. That cost will go up quickly if you require a more sophisticated set of bylaws or a tailored operating agreement.

Also, consider the ongoing costs for additional tax returns, separate accounting, and state minimum franchise fees.

Where Should I Incorporate My Business:

Most states require you to register your corporation if you maintain an office or own property in that state. Therefore, you generally can not avoid the filing requirements and franchise taxes of the state that you operate in by incorporating your business in another state. However, if you don’t plan on using a corporation right away, this may be a relatively low-cost way to establish it now.

Letting Business Net Income Reaches $80-100k:

Finally, in terms of cost savings, there is generally no advantage from incorporating until business net income reaches $80-100k.

The primary means of saving taxes through a corporation are limiting self-employment tax (Social Security and Medicare contributions) and the availability of income deferral through certain retirement options. Tax rate differences will usually only lead to savings at significantly higher incomes.

Consult With A Professional For More Guidance

We hope the above will give you some food for thought. The SMCo team recommends a short consultation with an accountant and an attorney before incorporating a business, particularly if multiple owners are involved. The cost of such consultations may save a lot of time, money, and headaches in the future.

Peter Wesch, EA
Smith Marion

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