5 Questions to Answer Before Incorporating Your Small Business

It is relatively easy to incorporate your small business. Most states have online, government-implemented portals that let you fill in the blanks, pay a fee and get your certificate of incorporation. Knowing that you can incorporate does not mean that you should. Before changing the fundamental structure of your organization, understand what you are doing by incorporating.

How am I taxed?

The tax implications of incorporation can be significant. According to Cornell Law, a corporation is a legal entity that uses shares to indicate percent ownership. This means that your business becomes an entity outside of you, compared to a sole proprietorship which is intrinsically linked to the owner. For a successful business corporation with one shareholder, this can mean that you are taxed twice. The corporation will be taxed based on profit then the money that you make will be taxed as a salary from the corporation. So if both you and your corporation are taxed 28 percent and the corporation makes $100,000 in profit that will eventually all go to you, $28,000 will go to the government from the corporation, leaving $72,000 for you. On your personal taxes, you will pay another $20,160, leaving you with $51,840 net income.

Is my information safe?

At a minimum, incorporation documentation needs contact information for the primary board members. In most states, this information becomes public record. People can use a law office or specialty business as its registered agent but this costs money so most people use their own home or office information as the contact. This is actually a better business practice because it offers transparency. To protect your business and personal identity, an identity monitoring and protection plan can keep you in front of the curve in the case of identity hacking.

Do I still own the company?

At the time of incorporation, the incorporator as the sole investor holds all of the shares of the business. One of the benefits of incorporation is that these shares or new shares created by the company can be sold to other investors to generate capital for expansion. Of course, if you sell off more than 50 percent of the shares, you will lose controlling interest in your own company so consult a professional before looking for venture capitalists.

Does it protect me?

One of the greatest benefits of incorporating is that there is a built-in limited protection against personal liability. Since business debts are paid by business assets, your personal assets, like a house or savings, are safe. If all hell breaks loose, you will only lose your initial investment. There are some caveats to this limited personal protection. According to NOLO, the online law resource, if the corporation is an extension of your personal finances, called a corporate veil, then the protection goes away.

Is there anything that I need to do afterward?

The short answer is yes and the long answer is yes, a bunch of stuff. The IRS requires annual filings plus quarterly taxes and annual employee tax information. To make sure that a corporate veil does not exist, bank accounts should be created for the company and there should be a countersigner for the account. A board of directors will need to be established and annual meetings, at a minimum, should be held. All of this will need to be documented and records maintained for seven to 10 years.

 

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