A dentist friend has been a sole proprietor for many years. Recently, he decided to incorporate - in Nevada (he lives and works in Iowa). I'm wondering if he is incorporating for the right reasons.
Susan Ward, Guide to Small Business: Canada, has an excellent article on Reasons to Incorporate Your Business. Some of her reasons are specific to Canada, and Canada has no limited liability company entity, but otherwise, the article gives you something to think about if you are considering incorporating your business.
Reasons to Incorporate (or Form an LLC)
1. To get financing. Some lenders prefer that you have a specific legal business structure, rather than just a sole proprietorship. They especially like corporate structures for liability purposes (see reason #2), so you can pay off their loan even if you have a liability issue.
2. To limit potential liability. Liability is variable, depending on the type of products or services you provide and the number and type of employees. If you are working at home writing software or a blog, your liability is probably limited. On the other hand, if you have products that could harm people or if you have employees, you might want more protection than just liability insurance.
3. For tax reasons. This one is tricky. Corporations are separate tax entities, and the taxes on a corporation may or may not be greater than taxes for a company that is taxed at the owner's personal rate. Spend some time with your tax advisor to make sure you understand the tax implications of incorporation.
4. To manage income as your business grows. When you start out, you may not be making money right away, and you may decide it's not worth it to incorporate. But as you go along, you may find that you want to separate your business income from personal income and take a salary. Having a corporation allows you to do this; it's one case where a corporation is preferable to an LLC (an LLC is taxed at the personal tax rates of the owners). Timing is important, so if you think you might be making a lot of money in a particular year, you may want to switch to a corporation or S corporation.
The bottom line: Don't incorporate just because your attorney says it's a good idea. Attorneys make money helping you incorporate, and they make no money if you stay a sole proprietor or create a do-it-yourself LLC. Review all the alternatives and consider what's best for your business at this time and into the future. Remember, it's always possible, and easy, to change from a sole proprietorship to an LLC or a corporation. It is almost impossible to un-incorporate your business and go back to being a sole proprietor.
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