Like any other small business owners, you might be interested in Incorporation as it comes with certain level of flexibility and tax benefits. However, failure to do it the right way may land you in troubled water. Incorporation, contrary to popular perception, is a fairly complex process and it is extremely tough to manage single-handedly. So, my humble suggestion is to be remain aware of the three major mistakes that I am going to describe here –
Incorporation Too Early: Do you know why majority of small business owners want to get their business incorporated? Yes, they believe that [I have no such idea about the source of this belief], by getting their small business incorporated, they will be relieved from personal liabilities. But this is not a great idea and here is why it is not that great idea:
First thing first, contrary to what you believe, you are hardly protected against the liabilities. Since you will be an active corporate shareholder, you will always be held responsible for any kind of damages caused by any representative of the company and you can even tried in court in some worst cases.
It is true that the shareholders give you some kind of financial security, but when it comes to lending money from market, lenders will always press you to give personal guarantee otherwise, the deal is bound to fail.
Are you sure about the Structure: How much you are going to get benefited is entirely dependent on what business structure you are choosing apart from sole proprietorship. The simplest form of incorporation is certainly a limited Liability Company. This is less complicated and requires less paper works and what is all the more interesting is that it comes with similar level of liability protection like any other form of corporation.
S Corporation certainly offers more flexibility than LLC. It is basically a partnership for tax benefits. A C Corporation is a good fit for company with large shareholders base. The main benefit of forming a C Corporation is that you will enjoy lower corporate tax rate on profit but it has own share of shortcomings. C Corporation suffers from double taxation on profit when it is paid out to the shareholders.
Tax Filing: Since every state has its own set of incorporation rules and tax return policies, you need to understand each of the section otherwise the incorporation status of your small business will come under direct threat or you find yourself paying more than what is required in the form of some sort of penalties. Now, if you are planning to form a C Corporation, you need to think twice because this will require you to hire an experienced accountant who is quite capable of handling the nitty-gritty’s of corporate tax returns.
So, think twice before you jump.
Michael Evans is a passionate blogger and he is chesterfield-group.com, which is an Offshore Company in Cyprus.
