That, says Fran Coet, a certified financial planner in Westminster, Colorado, creates a system of checks and balances that reduces mistakes. The sole proprietor of a business typically must pay self-employment taxes—Social Security and Medicare taxes—as well as federal and state income taxes on all earnings. One perk of incorporating your business is limited liability. Pass-through taxation is when the taxes pass through the business and onto the owners or individuals. And after you establish your corporation, these fees don’t disappear. Other features of LLCs are more like a partnership, providing management flexibility and the benefit of pass-through taxation." We are committed to providing timely updates regarding COVID-19. are up for grabs. If you want to succeed, you need all the advantages you can get. Both corporations and LLCs allow owners to separate and protect their personal assets. Before you decide to incorporate your business, weigh your pros and cons. Because corporations are more complex than other structures, they tend to be more expensive to set up than other business structures. It can protect owners from things like lawsuits, debt, and financial losses. Having INC. or CORP. after your company’s name adds a touch of professionalism and credibility to your business dealings. Tax Advantages to Incorporating. Another pro of incorporation is continuance. Corporations, however, use double-entry accounting, which requires two ledgers—one for debits and one for credits. “New businesses are not usually aware that the self-employment tax is coming at the end of the year, so it can be a real shock,” says Richard Chapo, a San Diego tax attorney. This is NOT the case with sole proprietorships, partnerships or even limited liability companies. For a corporation, this means you’re taxed on both the personal and business levels. “New businesses are not usually aware that the self-employment tax is coming at the end of the year, so it can be a real shock,” he said. C corporations are also double-taxed when they attempt to distribute property out of the company, Riess said. To be successful and hold the line financially, however, tax experts agree that even the smallest of businesses may benefit by incorporating. It may offer only one class of stock. Take a look at some pros of incorporating … Here’s an overview of the kinds of fees you may have to pay if you want to establish a corporation: Many states impose ongoing fees on corporations. Small business owners who are not incorporated face an uphill battle when it comes to taking loans out from banks, said Fran Coet, a certified financial planner in Westminster, Colorado. The proof of that benefit is visible in statistics published in the the 2010 IRS Data Book. Most people feel more secure and confident dealing with a corporation as opposed to a sole proprietorship. The IRS does not require partnerships, S corporations and C corporations with gross receipts of less than $259,000 and assets less than $1 million to show a balance sheet on their returns. Refund Advance is a service offered by Intuit TT Offerings Inc. (NMLS # 1889291), a subsidiary of Intuit Inc. Limited interest and dividend income reported on a 1099-INT or 1099-DIV. C corporations also have additional filing requirements if they are public corporations, which can be extensive and time consuming. “You’ve got accounting and financial statements instead of a bucket of receipts in the back of a pick-up truck," Coet said. Corporations are generally much easier to sell and are usually more attractive to buyers than either a sole proprietorship or partnership. In the eyes of many small business owners, the corporate world is the realm of massive conglomerates such as Microsoft and General Motors. Your corporation can then claim the rental expense. We always enjoy making new friends! If you want to take on investors you simply sell shares of stock. Incorporating your business allows you to be a little more flexible when it comes to distributing income. This is usually NOT the case with a corporation. To maintain a corporation, you must keep detailed records of your articles of incorporation and bylaws, including information about meetings as well as a register of directors, members, officers, and shareholders. An LLC can be classified as an S corporation or as a partnership for income tax purposes. And, it still exists even if the ownership of the business changes. The entire process was fast, efficient, and flawless. Incorporation is the formation of a corporation, or C Corp. Small businesses may start out as a sole proprietorship or partnership and incorporate later on. Thanks again, and keep up the good work! “If you’re just a sole proprietor, Joe the plumber, and you have a truck and it’s just you, what do the banks have to look at?” Coet asked. When you’re looking to raise money through investment or borrowing, a corporation can actually make finding and getting the money you need easier. Try it for free today! This means that the facility is not the members and physicians involved in it, and the physicians and other employees are not the company. To form a corporation, you have to pay fees. Incorporation pros and cons. Incorporating, while definitely not for everybody, offers several distinct and money-saving advantages over the other types of entities. To be successful and hold the line financially, however, tax experts agree that even the smallest of businesses may benefit by incorporating. Limited Liability Company (LLC) Formation, State Processing Times for Business Formation Filings, Secretary Of State Complete Access Gateway, Active Filings – The 3rd Oldest Incorporating Service. This article has been updated from its original publication date of August 18, 2015. Fees for corporations are ongoing and can be costly for small businesses. Assume, for example, that a C corporation owns a car for which it originally paid $25,000. In 2010, the IRS audited only 0.4 percent of S corporations, but it audited 8.0 percent of individual business owners who made more than $100,000. If she incorporates her business, however, she may take a reasonable portion of the earnings as her taxable salary, so that the balance is not subject to self-employment taxes. LLCs are popular because, similar to a corporation, owners have limited personal liability for the debts and actions of the LLC. "A Limited Liability Company (LLC)," the IRS website explains, "is a business structure allowed by state statute. Terms and conditions, features, support, pricing, and service options subject to change without notice.Security Certification of the TurboTax Online application has been performed by C-Level Security.By accessing and using this page you agree to the Terms of Use. When you incorporate you create a separate and distinct legal entity. We just received the documents in the mail. If you want to start a business, but would like to remain anonymous, a corporation is the best way to accomplish this. "For federal income tax purposes," the IRS explains on its website, "a C corporation is recognized as a separate taxpaying entity. Interested in learning more? An LLC, by contrast, is a partnership, and only the partners pay taxes. C corporations, also known as general corporations, have no restrictions on the number of shareholders. Find out what kinds of disadvantages come with incorporating your business. Read on to learn the pros and cons of incorporating a business to determine if it’s a good fit for your company. An S corporation, as defined by the Internal Revenue Service, must be a domestic corporation that consists of no more than 100 "allowable shareholders"—including individuals, certain trusts and estates. Check with your state to find out information about fees they charge corporations. There are no checks or balances.”. Ready for retirement. This is not intended as legal advice; for more information, please click here. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business. Take a look at some pros of incorporating your small business. A corporation conducts business, realizes net income or loss, pays taxes and distributes profits to shareholders.". Can I keep up with the additional paperwork? Get started in 10 minutes or less! When you incorporate there are numerous tax advantages at your disposal that are virtually impossible to accomplish with other business entities. And, ask yourself the question, Will I be able to afford the ongoing fees associated with incorporating my business? For example, if a company lost $60,000 in 2020 it could choose to carry that loss forward, typically for up to seven years in most states. Capital can be raised more easily through the sale of stock.