Should You Incorporate Your Business?

Incorporating your business is easier than you might think, as we’ve previously discussed. There are a number of advantages to doing so, but to be clear, you should ask yourself these questions about your business before deciding to incorporate. 

How much money does the business make?

Incorporation makes sense for a lot of businesses from a financial standpoint. S and C corps are taxed differently than sole proprietorships, and the differences paid in taxes can be a great benefit to your business. As an S corporation, you only pay income tax on the business’s profits. The owners of LLCs and sole proprietorships must pay income and self-employment tax, which is 15.3 percent of their total profits. S corporations do not pay the self-employment tax, saving a decent chunk of that 15.3 percent. 

But S corporations need to pay what is called “reasonable compensation” through payroll. But the business will pay half of the payroll taxes (7.65%) and you will pay the other with paycheck withholdings. While it may read as a high percentage, you’re still only paying the self-employment tax on your total salary, not your total profit.

A C corporation pays corporate tax on the company’s profits while the owners pay income tax only on the dividends they’re paid. Consequently, as the owner, you’re not taxed on the whole profit of the business, but just the profits paid to you. If as the business owner you only take a profit from the C corporation and not business dividends, then only the business pays taxes on the profits. And under the new tax bill, the corporate tax rate has decreased from 35% to 21%, which provides even more savings. 

As a general rule of thumb, if you make more than $60,000 in profits a year, incorporating could save you a significant amount. 

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What kind of legal protection do you need?

One of the biggest advantages of incorporating a business is that it separates your personal assets from business liabilities. Because of that separation, you’re protected if your LLC or corporation is sued. There are a few exceptions, but in general, the assets of business owners who operate an incorporated business are protected. 

Another bonus is that owners are not personally liable for a business’s debts unless you’ve signed a personal guarantee. Debts owed by the business can only be paid back by assets owned by the business. This can come in handy if you own a car, home, or other personal property. 

So, how much legal protection do you need? Often, this is best answered by the industry your business operates in or by what products or services you sell. Ask yourself the following questions about potential legal issues:

  • Does your business sell or make consumable products or things applied to a person’s body?

  • Do you have employees? If so, do you want to be personally liable for their actions?

  • Does your business have a physical location with the risk of an accident?

If you’re at all worried about liabilities for your business, incorporating may be your best bet for legal protection.

Does your business need its own line of credit?

If you decide to incorporate your business, it becomes its own entity with its own line of credit. It may come as a surprise, but just like an individual, businesses have their own credit scores and credit reports. Just like an individual builds credit, businesses do too. And when your business builds great credit, it can:

  • Open a line of credit

  • Open a business credit card

  • Apply for a business loan

  • Establish trade lines with vendors and  partners

Much like shielding your personal assets from business liability, incorporating your business means your personal credit is not affected by your business credit. As you think about the future of your business, consider the likelihood of needing a business loan or the need to establish payment plans with vendors. If these scenarios are in your future, it may be best to incorporate to start building your business credit.

What’s your long-term business plan?

We all know how easy it is to get distracted by day-to-day nonsense and let important goals sit by the wayside. But your long-term business goals should always be in the back of your mind, especially when it comes to important decisions like whether to incorporate. Let’s look at example questions.

  1. Do you plan to eventually sell the business? If you plan on eventually selling your business, you’ll want to incorporate it so it becomes an entity to sell.

  2. Will your future contracts or partners require incorporation? A lot of companies won’t work with a business if it’s unincorporated. A lot of customers and businesses will think of your brand as more credible if you become an LLC or S corp.

  3. Are you seeking capital funding? It’s typically much harder to win over investors if you’re not an incorporated business because you won’t be able to issue stock.

  4. How much do you care about your brand and namesake? Once you incorporate your business, it becomes registered with the state and federal government. This means no one in the state can use the same name as your company. This can be particularly important if you rely on brand recognition.

There are a lot of factors to consider if you’re on the fence about incorporating your business. And while Dominion can’t help you pull the trigger on such a decision, we can provide exceptional payroll and HR software for your business.