State Incorporation Mistakes To Avoid
If you're a small business owner thinking about incorporating
, you've probably done lots of research already about how the process works and about the benefits of incorporation. But you probably also want to boost your knowledge in one other area--the incorporation mistakes you should avoid. Fortunately, with just a bit of planning and upfront research, you can easily avoid the biggest, most disastrous blunders.
Mistake #1 to Avoid: Unnecessarily Incorporating Your Small Business
Incorporating your business venture does reduce your business risks and may minimize taxes. But the benefits don't accrue automatically nor is all situations. Accordingly, verify that you will enjoy benefits.
If you must personally guarantee contracts or if you yourself provide all of the services, for example, incorporating may offer you modest legal protection. Personal guarantees and tort liability (for your own actions) may obviate the corporation's protective shield.
Furthermore, until your small business starts making significant profit, incorporation make not actually save you money. Running a corporation typically costs more in accountant's and attorney fees. And incorporation often doesn't save much money until you're paying quite a bit of income or payroll tax.
Mistake #2 to Avoid: Ignoring the Limited Liability Company Option
While some business people automatically think "corporation" for a new startup, a new business can also be operated as an LLC. And the limited liability company delivers big advantages over the historical corporate form.
Choosing to use a limited liability company, for example, often means simpler tax accounting. A one owner LLC (also known as a single member limited liability company) shows its income and deductions on the owner's regular tax return.
Example: A single member (one owner) LLC that owned by an individual that operates an active trade or business reports its business income and deductions on a Schedule C form on the individual's regular 1040 tax return.
Another clear advantage of the LLC? A limited liability company means easily corporate governance and operation as compared to a traditional corporation.
Mistake #3: Forgetting the S Election
A third, painful "incorporation" mistake is skipping or forgetting about the Subchapter S election which allows the corporation to avoid paying federal income taxes on the business profits.
By default, corporate profits are subject to income taxes when earned by the business and then again when distributed to shareholders as dividends. This double-shot taxation disappears, however, if the shareholders elect "Subchapter S" status.
Tip: Stockholders must make the "Subchapter S" election before or at the very start of the first year they want to escape corporate double-taxation.
Note: The precise deadline for making an S election is by the fifteenth day of the third month of the tax accounting year. If a corporation exists on January 1, for example, the election needs to be submitted to the Internal Revenue Service by March 15. Note, too, that S elections can be made up to twelve months in advance.
by: Stephen Nelson
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