With the growth of small internet-based companies, more and more people are looking at the opportunity of incorporating their business. Most business owners can benefit from incorporating their business.
Learning the incorporation of small businesses can result in building legitimacy for said business and supporting a solid reputation. It is also doubly beneficial to the sole proprietor business where it can reduce liability and income taxes. These benefits take the form of one of two possible companies.
The Limited Liability Company
This company (abbreviated as LLC) limits the financial liability to only the corporation that the small business owner has incorporated with. This of course doesn’t completely protect the small business owner from legal actions if they are found guilty of specific crimes, and many can be held responsible for these legal issues.
The LLC also allows of tax splitting. Corporations pay their shareholders from the company’s earnings, and these shareholders do not need to be directly involved in the company to receive the payments. This allows you to let family members become shareholders who are taxed at a lower rate (because of low incomes).
By learning how to incorporate with this business, a small business owner can reduce the amount of self-employment tax. This all depends on the difference between the amount of money the business makes providing a service and the amount an employee would be paid providing the same service. Individuals such as independent contractors and farmers are the most common to incur this tax.
The Drawbacks Of Both
The incorporation of an LLC company can see the managerial duties of the small business owner dwindled over time, losing control over the company. In the same vein, S-Corporations are difficult to maintain because they act like a corporation and small business owners may be overwhelmed by the prospect of heading such a large business.
Once the company gets this big, a board of directors is brought in and from there they make all the decisions, also limiting the control of the original business owner of the company. S-Corps can also own only one type of stock and that stock is limited to only 100 shareholders.
Not to mention that the state can limit what type of small business can become an S-Corporation. Not to mention that both of these corporations are not exempt from taxes. Neither are available for personal tax credits, meaning every penny a corporation earns is taxed. As a small business there is a chance you can claim some tax credits corporations don’t have the chance of.
Learning the ins and outs of business incorporation – whether to limit liabilities with an LLC or reduce income tax with an S-Corp – is something that benefits all independent contractors. Some corporate structure is better than none. Incorporating a small business adds to its public appearance and even life span.
Of course, with incorporation comes paperwork and practices that small businesses may not be ready for. But the benefits of learning about business incorporation are worth it in the end.