Should You Inc. or Not?
A brief lesson on the ABCs of LLCs and other legal forms for your new business
Q:
What's the difference between being incorporated and not
incorporated?
Name withheld
A:
Every business needs to take a legal form. If you don't make a
choice, a one-person business is, by default, a sole
proprietorship. But there are other choices-a partnership, an LLC
and incorporating. Each form has its own costs and legal and tax
implications.
Incorporating is like wearing a raincoat: It protects business
owners against personal liability if the business can't pay its
bills or if it becomes liable for monetary damages. While
you're not going into business expecting misfortune, some
people also incorporate to protect their personal assets.
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If you're in business with someone else, there's always
more risk-so to protect yourself against liability, you may wish to
incorporate rather than do business as a partnership. A
less-expensive choice would be to form an LLC, which provides the
liability protection of incorporation without the additional taxes
incorporation involves.
But if your business is prospering, you might reduce the overall
taxes paid from your corporation's earnings by choosing a C
corporation until your profits reach six figures. If you're a
one-person or husband-and-wife business seeking corporate tax
benefits, you only need to consider a C corporation. The federal
tax code also allows S corporations, but these don't offer the
same tax advantages. Some states, like California, don't even
recognize them.
In addition to cost, there are other disadvantages to
incorporating. Corporations are subject to more government
regulation than other forms of businesses; documents as well as
taxes must be filed regularly. And paperwork must be done right, or
the protection a corporation offers can be challenged. To protect
yourself, consult a lawyer before making your decision.
Paul and Sarah Edwards' most recent book is Changing
Directions Without Losing Your Way. Send them your start-up
questions at www.workingfromhome.com or e-mail
entmag@entrepreneur.com.