Every business starts with a concept. An idea for a product or service is born in the mind of an individual or a team of professionals, and from that bud a company will grow. As you take your first steps toward incorporation, you’ll quickly find that there are a number of dilemmas facing you and your team as you try to establish the foundation for a successful business. What are some of the common dilemmas small business face during the incorporation period?
Who Owns the Company?
If you’re an individual launching a new company, the answer seems pretty straight forward. Whether you launch as an S-corp, C-corp, or sole proprietorship, you most likely will retain ownership of the company. What if your idea is the brainchild of multiple people? A partnership may be required if all parties wish to retain sway in the direction of the business in the future. If the goal is to grow a company exponentially in the future, it may be wise to change the status of the company to allow for the sale of shares, effectively handing over some say in the direction of the business to outside investors.
How Much Will it Cost?
It is hard to pin down the exact cost of the business incorporation, largely because the cost will be associated with the location of incorporation and the type of business structure you select. Incorporating can cost as little as $200 to $300, or as much as a couple thousand dollars. To determine the true cost of incorporation, you’ll need to learn about the filing fees and other costs associated with incorporating in your state. If you file your paperwork on your own, you can save yourself roughly $500 to $1,000 in lawyer’s fees, but you might also miss a key detail in your state’s law that could negatively impact your incorporation process.
What Tax Rates can I Expect to Pay?
The tax rates you pay depend upon the state in which you incorporate and the business structure you choose. Generally speaking, Limited Liability Companies (LLCs) and S-corporations are the most common forms of incorporation for small businesses. Both offer liability protection for the owner (protecting your personal assets) and pass-through income tax treatment, allowing you to report on your personal income and not that of the business.
The path to incorporation offers various tax benefits to business owners. If you were to remain as a sole proprietorship, you remain financial obligated to the debts of your business and your personal assets are open to lawsuits filed by competitors or consumers. Additionally, you’ll face higher tax rates as a result.
Focusing on the most common business structures, S-corps and LLCs, you’ll find a number of tax advantages available. In regards to an S-corp, the IRS offers up the following information:
• Income, losses, deductions, and credits are passed to your personal returns for federal tax purposes.
• No business taxes are levied by the federal government.
• Your income and profits are only taxed once, rather than twice as in a C-corp structure.
When it comes to an LLC, there are benefits that do not extend to other business structures. According to the FOXBusiness Small Business Center, LLCs have the following advantages:
• Protection of personal assets in the event of a lawsuit or judgement against the business.
• Business itself is not responsible for taxes on its profits.
• Pass-through taxation allows you to report share of profit or loss on individual tax returns.
• No residency requirement means that owners don’t have to be US citizens or permanent residents.
The key to incorporating your small business is research. Take the time to learn about the business structures available, investigate the state laws that impact your small business as you consider incorporation, and move forward with a full understanding of what incorporation will mean for your business.