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Time to Incorporate or form an LLC?

by | Accounting, Business, Tax

At this time of year, and in light of the recent tax cuts and the favorable tax rates for the C-Corp and S-Corp, sole proprietorship and general partnership clients may be wondering if it’s time to create a formal business structure like a corporation or LLC.

 

Here are 5 reasons why a small business would choose to incorporate or form an LLC:

 

1. Personal Asset Protection

 

  • Both corporations and LLCs allow owners to separate and protect their personal assets.
  • In a properly structured and managed corporation or LLC, owners should have limited liability for business debts and obligations.
  • Corporations generally have more corporate formalities than an LLC that must be observed to obtain personal asset protection.

 

  1. Added Credibility

 

  • Adding “Inc.” or “LLC” after your business name can add instant legitimacy and authority.
  • Consumers, vendors, and partners frequently prefer to do business with an incorporated company. In most states, other businesses may not form an entity or use a trade name that is the same as your corporate name.
  • This benefits the business legally and helps in brand-building and marketing.

 

  1. Perpetual Existence

 

  • Corporations and LLCs can continue to exist even if ownership or management changes.
  • Sole proprietorships and partnerships just end if an owner dies or leave the business.

 

  1. Tax Flexibility

 

  • An LLC is taxed at the same rate as a sole proprietorship while providing limited exposure to personal liability.
  • Generally, profit and losses typically pass through an LLC and get reported on the personal income tax returns of owners, an LLC can also elect to be taxed as a corporation or an s corporation if they meet the qualifications for the s corporation.
  • When an entrepreneur sets up a corporation, he or she is taxed on both the individual and corporate levels. However, a corporation can avoid double taxation of corporate profits and dividends by electing Subchapter S tax status.

 

  1. Deductible Expenses

 

  • Both corporations and LLCs may deduct normal business expenses, including salaries, before they allocate income to owners.

 

If there are any tax advantages to incorporating or your concerned about liability, then it’s best to incorporate or form an LLC as quickly as possible.

 

January is a great start date, but keep in mind that January is also the busiest time of year for processing incorporation applications at many Secretary of State offices. In some cases, it can take close to 60 days to bring a corporation or LLC into existence after filing the documents.

 

One option is to use a “delayed filing’ option with a document filing service. We can help you complete your LLC/corporation paperwork now, but then delay the incorporation date until next year. This means the application will be fast tracked to the front of the line when the secretary of state office opens in the beginning of the year.

 

Let’s close out the year strong and make sure your set up for success in 2019!

 

Important: Please contact me within five business days at (916) 905-7444 should you disagree with any information contained herein. All consult or correspondence with 5 Star Accounting & Business Solutions, LLC and its representatives is based solely on current knowledge of client and/or information acquired and provided by you or your representatives and should not be considered legal advice. Please defer to an attorney for such guidance.