For the small business owner, the question of incorporating is a pointed one. A large percentage of small companies are run as sole proprietorships for a variety of reasons. At some point, though, the idea of incorporation comes up, and there are some valid reasons to go through the effort.
No one likes to pay taxes, even if they support the services that those taxes provide. If you own your business you have probably already found out that you must pay more taxes on your income than you ever did when you were employed by someone else. Why is this?
When you are an employee, your employer paid half of your Social Security and Medicare taxes. Now that you own the company, you must pay both halves: yours and the business half. That comes out to a fairly significant percentage of your income.
S-Corps Can Save You a Lot
There are number of ways to incorporate, but one that is particularly popular with small business owners is the S-Corp.
First, you will save if you don’t make a profit in the beginning. Any losses the company suffers are deductible from your taxes. While you won’t recoup the entire amount, it can really add up.
Second, a S-Corp allows the owner to pay out part of the company’s profits as corporate distribution. This dramatically reduces the amount charged for Social Security and Medicare since a distribution isn’t the same as a salary. Part of the profits will remain as regular salary, but you can cut your taxes in half or more with such an arrangement.
Protect Your Assets
Did you know that if you run your business as a sole proprietor or contractor, everything you own can be tapped in a financial crisis? Many business owners don’t know this until a problem occurs and suddenly their home, vehicle, or savings account is on the line. Even if you carry insurance for your small business, any assets you have are in jeopardy if you don’t incorporate.
Incorporation puts a layer of protection between your personal assets and your business assets. If you are ever sued as a business, none of your personal assets can be touched if you incorporate properly. Of course, this means that you have to be very careful to follow appropriate procedures when you pay yourself out of your business funds, when you deposit payments, and when you keep your books, but it is well worth the extra effort to provide such protection.
You don’t actually need an attorney to incorporate under most circumstances. How much you will spend will depend upon the local laws. Each state will have specific guidelines for you to follow, and you can even opt to do the whole job on your own. Online services can help you through the process, at a cost, and in a couple of days you will be legally incorporated.
To find out what is required in your state, contact the office of the Secretary of State (SOS). You can usually find all the forms you need and have your questions answered online at the SOS website.
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