How to incorporate your business . Should you?

2007-03-08 10:33:40

( Business )



Because of the recent high incidence of corporate mergers and the consequent reduction of staff, increasingly large numbers of professionals need to create jobs for themselves as contractors and consultants.

The questions are: how to incorporate your business and whether you should. Maybe you will decide not to [incorporate your business] – there are other options, which might be more feasible for you.

Whether you decide to [incorporate your business] or not means that you need to understand the issues involved, like:

- Taxation
- Liability
- Control
- Simplicity

There are a number of legal options- more or less advantageous – which you can choose:

- Sole proprietorship
- Partnership
- Corporation

Not only do you have to consider the national tax rules but each state has its own tax rules as well. But before you decide to [incorporate Delaware] or [incorporate in Nevada] you should consider whether you need to incorporate at all. Although, incorporation protects you from personal liability, there is also a lot of paperwork which you might not like.

Sole Proprietorship

- You conduct business as yourself
- Legally this is the simplest form because the state does not regulate you. You are in control and you don’t have to divulge any business information to anyone.
- You file your personal tax return and those in connection with workers compensation and tax withholding
- You declare the earnings of the business
- If the company is sued, you are responsible

Partnership

- Two or more people form a business together, but not a corporation.
- Legally this is the same as a sole proprietorship, but with more people
- You need to decide the contribution each partner will make, the extent of their control and how they will share the profits and losses.
- All business income is taxed as personal income

If the partnership is limited, the limited partners aren’t personally liable, but they also don’t have any control over the business.

Corporation

- Stockholders are not liable for the activities and responsibilities of the corporation
- Corporate officers can be fined or sued for wrongdoing.

A corporation can be either a:

- C corporation
- Subchapter S corporation

Before you decide how to incorporate your business, you should understand the difference between these two options. The rules governing both are the same in every way except in terms of taxation.

C Corporation

- Corporation profits taxed
- Profits shared as dividends to the stockholders
- The stockholders taxed on these dividends

S Corporation

- Stockholders are responsible for the profits and losses and report these on their personal tax returns
- No assessment of personal income tax

When you decide how to incorporate your business, the S corporation is probably the most advantageous because:
- It has protection from liability
- It avoids paying double taxes

However whether you [incorporate in Nevada] or [incorporate Delaware] as an S Corporation, it means that your company can never grow large.


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