6 Things to Consider
Before Incorporating Your Company
One of the most common requests that we get from our clients, obviously, is for support in the incorporation process. In most cases, this starts out as a 'corp. vs. LLC' conversation, and quickly turns into a high-level discussion about the business's objectives and plans. Clients usually come to us expecting that we will recommend they create an LLC online and go on their merry way. In the majority of cases, however, the best option may be a corporation or even to remain a sole proprietor while you determine the absolute best way forward.
Dissolving (shutting down) a business entity requires some paperwork and will usually have fees involved, IF YOU'RE ENTITY IS MAKING MONEY, and if so can be quite an expensive mistake to choose the wrong entity. But, if your intention is to form a "S" corporation, then there is the flow through effect and costs are minimal, if any costs at all will exist. In the state of Nevada, it's usually only a few forms to file with the local & state Tax authorities, i.e., "modified tax forms", "Use Tax Forms", etc.
In addition, a business entity usually needs to have its own taxes filed at the end of each year (except for a single-owner LLC, in some cases) and even if you decide to close the business you'll probably still wind up paying an accountant to prepare the returns - Corporate Formality offers these services as well. Non-the-less, we want you to get it right the first time!
To help you choose the right plan for incorporating your business, here are some key topics that you need to consider and understand before you take the plunge and incorporate:
1. Why are you forming a business?
This seems like a simple question but it's amazing how many small business owners can't answer it. There are two primary reasons that businesses are started:
- to reduce taxes, and for liability
- to protect personal and business assets
- to shield or shell their assets
These are ALL GOOD THINGS good things, but in many cases a business owner won't see either of these benefits. It depends on many factors, and in some cases a business will actually lose money by incorporating. THIS IS ESPECIALLY TRUE if the owner(s) do not utilize the proper formation, i.e., a Sub-Chapter "S" Corporation as opposed to a "C" corporation which immediately puts you in a libelous situation under the "double-taxation" of the IRS Code.
Before you incorporate, be sure the incorporation is going to be worthwhile by ensuring that you actually will save money overall. Remember, businesses usually have annual fees and, unless you know how to do your own taxes, you can plan on paying an accountant to file both your personal return and your business return once your business is formed. In many cases, once your bookkeeping is completed, via say "quickbooks" or other accounting software, they files can easily be uploaded to "turbotax.com" (another intuit product), be instantly read, recognized with the proper insertions of your finances placed in there respective categories, with your tax returns being prepared just as easily!
Look to $ave
If you are making $30,000/year and you spend $300 incorporating + $400 in accountants fees but only save $500 in taxes, you'll have wasted lots of time and ultimately lost money. As a rule of thumb, if your income is less than $50,000 you'll do just as well as a sole proprietor (an person doing business without a business entity) but the real bottom line can vary widely depending on circumstances.
To Operate as or CONTINUE TO OPERATE AS a "Sole - Proprietor" is DANGEREOUS to your financial well-being. You would remain TOTALLY EXPOSED & 100% Personally LIABLE!
If your goal is to reduce liability, be sure that you really have any liability in the first place.
Most Individual's HAVE MUCH TO LOSE!
- Your House?
- Your Car?
- Your Jewelry?
- Savings in a Bank Account?
- Stocks or Bonds?
- A Brokerage Account?
- A "Safe Deposit" Box?
SIMPLE EXAMPLE: The average web designer has very little liability, and what liability they do have would probably be well covered by a cheap professional liability policy. The same applies to asset protection: if you don't own a house or have significant savings there isn't much to protect and a business won't help you much.
Don't PROCRASTINATE! - Time is Money...
Bottom line: talk to an accountant and make sure that if you form a business entity you'll actually save money. There is no guarantee of this, and if you aren't making much money it's not always worth it. If you are looking for asset protection, be sure that a risk exists in the first place and consider that it may be simpler to insure yourself. Although in today's society, we DON'T RECOMMEND a simple insurance policy, though coverage is necessary in business, this won't stop any litigation for ALL YOUR ASSETS in the event of a lawsuit!
2. Who's your accountant?
Many people don't know the answer to question #1 because they don't have access to an accountant. Using TurboTax to do your taxes may be just fine right now, but TurboTax won't tell you how much you would save with a corporation or LLC - BUT WE WILL! If you have legitimate tax preparation skills (and I don't mean just using TurboTax!) you can do it yourself, if not we can also assist you & your business with this aspect of concern. While it is not absolutely essential that you secure a relationship with an accountant before you incorporate (especially if you've not begun earning any money), but at some point you may wish to form one. Again, we can make recommendations with astute CPA's here in Las Vegas, NV.
3. In what state should you incorporate?
This question usually attracts a few 'knee-jerk' answers: usually Delaware or Nevada. Yes, both of these states are friendly to corporations (in our opinion NEVADA is by far the friendliest) and there can be benefits to incorporating there. But, did you know that if you incorporate in Nevada but operate your business from another state, you are almost always required to register your business in your home state and file taxes there (this varies from state to state and may be another reason to consider hiring a nominee)?
In addition, a business that is domiciled (was formed) in a state that you don't live in will probably require you to have a resident agent there. This is simply a physical address that will agree to accept any legal correspondence that comes to you at your corporate address. In the end, filing outside of your home state will frequently cost you more than if you had just incorporated in your home state.
Before incorporating, be sure that you understand which state you need to incorporate in and which states, if any, you may be expected to register in to remain legal. If you have heard that Nevada or Delaware has lower taxes but don't know exactly how that will effect your business, be sure to find out or you may wind up spending more! - We can assist you with some research on our end, once we know some more of the details of your plans, reasons, etc.
4. Corporation or LLC?
The big question - a Corporation or an LLC? Everyone seems to have an answer for this and will happily share it with anyone who asks, but the real answer is this:
It depends on your business.
From a tax perspective, the difference may not be much. Or, it could be huge. An LLC can be taxed in different ways so a good accountant can file your returns in the way that will save you the most money. Typically, if you form an LLC, you have a managing partner with subsequent if not all of the other owners (remain hidden), it is not required for an LLC to divulge who the owners or partners of the LLC via the public record(s). Each partner of an LLC is responsible for his or her own taxes (LLC's operate similar to an "S" corporation), with each partner's liability limited to his or her percentage of ownership.
You as the managing partner, can have the ownership of an LLC of only 1%.... while your your "underage" children hold 98% ownership! Since they have limited or "no exposure" their ownership and "assets" remain shielded and protected...
LLC's can also a bit easier to operate and can sometimes be slightly cheaper. However, LLC's are subject to various rules about who can own them, how they can issue stock, and how their owners are compensated.
"C" Corporations can handle very complex stock and tax situations, and can be a bit harder to operate. In some cases, there are tax strategies that work with corporations but not LLCs, but most small business don't use those strategies - Let us enlighten you on how to use these POWERFUL STRATEGIES!
Sounds confusing but DON'T BE DISCOURAGED!
It is, but there are really only two things you need to decide:
Which entity will save me the most in taxes overall? It might be an LLC or a corporation, depending on how your business works. There is nothing more important than the bottom line, and an accountant can usually look at your books and tell you which entity will result in the lowest bill for your business.
How much is the relative ease-of-use associated with an LLC worth much to me? In most cases, an LLC will require a bit less paperwork than a corporation as a corporation requires annual minutes and reports to be filed. The additional overhead associated with a corporation isn't all that much, but if you want to keep it as simple as possible it's worth considering an LLC if the taxes won't be much different.
Again, this one is best decided by an accountant who can tell you exactly how this decision will affect your bottom line.
5. How will you operate your business and stay compliant?
Owning a business entity such as an LLC or corporation isn't difficult, but there are a few things you have to do to maintain compliance. If you don't know what compliance is, you can go to your local bookstore or the Nolo Press and learn all about it. In a nutshell, to keep a company compliant means that you've followed all the rules for operating the company legally, such as filing reports, keeping minutes of meetings (even if it's just you), and keeping records about finances and other business matters. Every state has slightly different compliance requirements, and if you don't maintain compliance a court of law (or worse, the IRS) can decide that your company is invalid and treat you like an individual for tax or legal purposes. This is called 'piercing the corporate veil' and it happens all the time to people who didn't bother to do a bit of paperwork each year to maintain compliance - otherwise known as CORPORATE FORMALITY!
Before you start your business, be sure you understand what you'll need to do to keep the business compliant, especially:
- Annual filings to the state in which you incorporate
- Minutes of meetings to confirm/resolve key decisions that the business makes
- Registered agent requirements
- Record keeping including bookkeeping requirements
- City or local taxes, registration, or licenses
- Estimated, quarterly, or payroll taxes
In most cases, keeping a small business compliant is easy and just requires a few forms to be filed each year. However, it's worth your time to find out exactly what you are expected to do and how to do it so that you don't risk all the benefits that you're presumably starting the business for.
A while back a client of mine told me that I was a fool for paying an attorney $600 to file a new Nevada corporation I was creating. He had created a similar entity online for $149 to protect all of his assets including his house. What he came to realize in our conversation, however, was that while he'd saved a bit of cash, the asset protection that he hoped to achieve with his Nevada corporation was quite limited compared to my own.
My corporation has been formed using articles of incorporation that were several pages long and invoked every possible Nevada statute that would help to protect my liability, asset protection, privacy, and compliance - it was rock solid. The online company that formed my client's corporation (it was the Company Corporation) had completed and submitted the absolute minimum contents for the articles of incorporation - they used the fill-in PDF that the Nevada website offers for the do-it-yourself incorporators.
By filing an amendment to the articles of incorporation, WE WERE able to update his Nevada corporation to the point where he had the protection that he needed. The cost? About $600 and some headaches.
We do what other's don't, can't or won't ...
Online incorporation services can be very helpful, but don't forget that they won't necessarily help you to form the business in the best way for your individual purposes, and they certainly won't help you to operate the business or keep it compliant. If in doubt, it's worth spending a few hundred dollars, we may need to charge, to make sure that it's done right as well as establishing a relationship with someone that can help you if you have any questions and needs in the future.
In the end, the incorporation process is generally easy and just involves a few forms and fees. As you can see, the presence of an EXPERIENCED TEAM that will review your personal situation and make recommendations is the single most important factor in your success.
Don't forget... if you, with our help, do it right you can potentially save lots and lots of money in taxes, while at the very same time - PROTECT YOUR ASSETS!
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