When you embarked on your journey as a small business owner, you encountered numerous decisions, ranging from service offerings and location selection to logo colors and font choices. Another crucial decision was determining your business entity, with many first-time entrepreneurs opting for the simplicity of sole proprietorship
However, if you're pondering the impact of your chosen business structure on taxes and income, it's prudent to contemplate the option of transitioning your business into a corporation.
In this week's blog, we explore the advantages of incorporating your business and considerations for the optimal timing to make this shift.
Establishing Your Business Identity
If you recently launched your business and feel that the income doesn't yet warrant corporate structuring, there's a psychological benefit to incorporating early. By doing so, you're not only securing potential liability and tax benefits, but you're also signaling to yourself, future clients, and the world that you're a bona fide business owner—a pivotal step toward future success.
Incorporation not only provides certain advantages absent in sole proprietorships but also fosters trust among customers, investors, and associates. People are more inclined to engage with companies they perceive as trustworthy. Even if your company is new, incorporation conveys the impression that your business is founded on a solid foundation.
Incorporating also serves as motivation to familiarize yourself with the benefits and tools available to corporations and the necessary steps for proper corporate maintenance. Even if your business is small, possessing an official corporate status demonstrates your commitment to its growth.
Shielding Your Assets from Business Debts and Lawsuits
As a sole proprietor, you put everything you own on the line for your business, not just your hard work and dedication. In this structure, you are personally accountable for accidents or liabilities arising in your business. If legal action ensues due to injuries or breached contracts, your personal savings and even your home are at stake.
Conversely, when you operate your business as a corporation, you can secure loans and conduct business transactions under your business's name rather than your own. By keeping your business's finances separate from your personal assets, incorporating mitigates your personal liability for business-related debts or legal disputes. As a corporation, creditors, clients, and potential litigants can pursue your business's assets but not your personal ones, provided the financial separation is maintained.
Tax Savings and Reduced Audit Risk
Another benefit of running your business as a corporation is the favorable tax treatment, particularly if you opt for S Corporation status, which is highly popular among small businesses. This status allows you to minimize income tax by drawing a reasonable salary from your business (subject to payroll tax) while taking owner's draws from the business, exempt from payroll taxes.
Additionally, although not guaranteed, corporations are notably less likely to undergo IRS audits compared to sole proprietors. Sole proprietors tend to attract more scrutiny from the IRS, as they might have greater flexibility in underreporting income, whereas corporations operate within a more regulated framework.
Planning for January Incorporation
If you're contemplating incorporating your business, the ideal time might be in the upcoming January, depending on your projected revenue for the current year. While it may seem unusual to consider January during the summer months, early preparation can prevent a year-end rush and allow you to begin reaping the psychological benefits of professionalizing your business.
To prepare effectively, start by outlining the roles you want within your company and gathering the necessary documents for informed decision-making. This might include updating your profit and loss statements and business plan. Collaborate with us to organize essential components that every well-structured corporation requires, such as Articles of Incorporation, bylaws, and an employee handbook.
Incorporating your business involves some effort, but commencing on the right foot will streamline the process, enabling you to focus on what you do best—managing your business!
If you aim to reduce liability and position your business for substantial growth, initiate a conversation with us. As your trusted Lifetime Family Lawyer firm, we can facilitate your business incorporation and establish a robust Legal, Insurance, Financial, and Tax framework to support your business's prosperous future.
We hope this helps give you some perspective and information and look forward to talking with you. If you're interested in creating an estate plan to protect your family and loved ones, and keep them out of court and conflict, we would love to speak with you. Reclaim Your Legacy!
Choosing Between Sole Proprietorship and Incorporation for Your Business
When deciding between a sole proprietorship and incorporation for your business, it's essential to understand the key differences. A sole proprietorship is the simplest business structure, offering ease of setup and complete control to the owner, but it also means personal liability for business debts. Incorporation, on the other hand, creates a separate legal entity, providing liability protection and potential tax advantages, though it requires more paperwork and costs. Evaluating factors such as liability, taxes, and administrative requirements will help you choose the best structure for your business needs.
Book your free 15 minute discovery call here.
In Your Service,
PS - In my mind, the real purpose of a properly executed Estate Plan is to take care of the people you love, protect your family for the future, maximize the assets you pass on to the people you love and cherish, and keep your family out of Court and Out of Conflict. This is a very important and noble part of LIVING! Lavelle Law Group, APC would be honored to help educate you and assist you and your family with this important part of life.
Let’s talk -
Joseph Lavelle (Lavelle Law Group)
1350 Columbia Street, Suite 500
San Diego, CA 92101
(619) 515-1498
joe@lavellelawgroup.com
