Forming a Corporation Around You
Things have been going pretty well for you as an independent IT professional — contracts have been rolling in, your work has garnered praise and you’re not scrambling to make ends meet. In fact, things have been going so well, you’re thinking it might be time to incorporate yourself. The more you think about it, Joe Schmoe Inc. has a lovely ring to it.
According to MyCorporation, there are benefits to incorporating, including liability protection, tax savings, a smaller chance of a tax audit, establishing a legitimate reputation in the business community and aid when raising capital.
Before you decide to take the plunge and form a corporation around yourself, there are some things you ought to consider.
First, determine what type of entity you want to be: corporation, limited liability company (LLC), etc.
According to MyCorporation’s Incorporation Guide, “A corporation is an independent legal and tax entity, separate from the people who own, control and manage it. Because of this separate status, the owners of a corporation don’t use their personal tax returns to pay tax on corporate profits — the corporation itself pays these taxes.”
A regular or C corporation can be expensive to create, though, and the paperwork that its creation requires can seem tedious and overwhelming.
An S corporation regular one that has “S corporation” tax status, according to the MyCorporation guide.
“Forming an S corporation lets you enjoy the limited liability of a corporate shareholder but pay income taxes as if you were a sole proprietor or a partner,” the guide states.
Further, shareholders do not have to pay self-employment taxes, which is the case for owners of LLCs.
“An LLC combines the corporation’s protection from personal liability for business debts and the pass-through tax structure of a partnership or sole proprietorship,” according to the MyCorporation guide. “And, while setting up an LLC is more difficult than creating a partnership or sole proprietorship, running one is significantly easier than running a corporation.”
Additionally, LLCs’ limited personal liability aspect makes them very attractive to many organizations.
“Like shareholders of a corporation, all LLC owners are protected from personal liability for business debts and claims,” the MyCorporation guide states. “Because only LLC assets are used to pay off business debts, LLC owners stand to lose only the money they’ve invested in the LLC.”
A drawback, however, for LLCs is that state laws for their creation do not necessarily reflect the most recent federal tax changes.
When determining in which state to incorporate, individuals are not required to do so in the state where they conduct business.
Because of their business-friendly incorporation laws, Delaware and Nevada are two of the most popular states where organizations can incorporate. The benefits associated with those laws, however, do not necessarily trickle down to smaller corporations.
“You’re not likely to save any money in taxes by incorporating in Delaware or Nevada,” the MyCorporation guide states. “While incorporation fees may be lower in other states than they are in your home state, you will have to qualify to do business in your state in addition to incorporating in a state other than your home state.”