To incorporate your business or not is a question a lot of owners ask themselves pretty often. You might either be just starting a business and wonder what your options are as far as incorporation, or maybe you’ve been operating as a sole proprietorship, and you’re thinking about timing and benefits of incorporating.
The following are some considerations to keep in mind that can help you determine whether or not the timing could be right to start the incorporation process.
Are You Growing Quickly?
Having a business that’s growing and thriving is great, and if that’s the case for you, you’re probably pretty happy about that. If you’re still operating as a sole proprietor, however, you could run into problems in the near future.
If you’re profitable, particularly if you’re very profitable, you should absolutely start considering incorporation.
As your business grows, it becomes even more critical to separate those finances from your personal finances, which is one of the number one reasons you should think about changing your structure.
Is Liability Involved?
If you’re planning to start a business where a high level of liability can be involved, you should form a corporation or at least an LLC as soon as possible.
Otherwise, even if your business is still small and doesn’t necessarily have a lot of assets, you could find yourself in a lot of trouble if something were to happen legally. Your personal assets could be at risk without incorporating or forming an LLC.
What Time of Year Is It?
If you don’t have a lot of liability issues, you might wait until the first part of the year to incorporate. When you start on January 1, it can reduce some of your paperwork, and you can begin a new year as a corporation or even as an LLC without having to report taxes from two different entities.
With that being said, January is the busiest time of year for processing these applications for incorporation, so it can take a few months for you to actually have your corporation formed after you file the paperwork.
You can also file your paperwork now to get it finished, and then set you effective filing date as January, if that’s better for you.
Do You Want to Pay Less to the IRS?
A significant advantage of incorporating your business comes in the form of taxes. If you are concerned about the amount you’re paying in self-employment taxes and you want to reduce your tax burden, one of the best things you can do is start the incorporation process. Not only does incorporating your business help protect you against liability and separate your personal assets, but it’s also a good way to keep more of your earnings.
While the above are some general ideas of when you should incorporate your business, every business is also unique. It’s important to work with legal and tax professionals that can help you decide the optimal structure for your business, and also assist you through the process within the framework of state and federal requirements.
