My business is currently structured as a sole proprietorship, should I incorporate?
Generally there are three reasons people want to incorporate:
1) Tax Savings
This is often overstated. With an S-Corp, income still flows through to individual income tax returns and has very similar tax implications as a sole proprietorship; and similar deductions are available for business expenses with either structure. Some tax preparers will tout tax savings that are achieved illegally, essentially taking too much pay as dividends or distributions rather than earnings, allowing the taxpayer to “save on self-employment taxes.” While there is an element of possibility here in saving on self-employment taxes, the structure has to pass the IRS test. The problem is that for an individual running a business, most income would be considered earned income to the individual by the IRS, not dividends from investment. So the usual tax savings touted for S-Corps is not always legitimate. In addition, corporations require arduous paperwork, including corporate meetings and minutes, along with additional fees to the CA Franchise Tax Board (minimum of $800 per year) and additional tax preparation/legal fees.
2) Liability Protection
This is usually unnecessary via incorporating, depending on the business type. Business owners can often achieve the same protection by way of acquiring business insurance, and for a much lower cost. It would be prudent to speak with an insurance agent to inquire about business insurance options. Remember, even with a corporation, owners of the corporation can still have individual liability despite the corporate "umbrella". For example, if a corporation owner drives under the influence and kills a pedestrian, the corporate "umbrella" will not protect that individual from legal ramifications. Ultimately, there's still a personal liability element even when a corporation is present.
3) Company Structure
This is usually unnecessary with a “one-person shop”, since incorporating isn’t needed in order to manage the different ownership shares of partners, shareholders, etc.
We recommend speaking with a qualified tax attorney for more information on incorporating. Contact us if you’d like an introduction...we’d be happy to help!
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