If you are a business owner, you might be wondering why incorporate a business? Many people run their small businesses as sole proprietorships for many years. However, as tax time comes round, you might be dismayed to see how much of your business income goes to pay taxes for a sole proprietorship. This is when many small business owners begin to consider if incorporation is right for their business.
One big reason why businesses decide to incorporate is that in the United States business law favors corporate interests, giving them rights, privileges and protections that are often no longer available to individuals. This goes back to an early Supreme Court case that had an amendment added to it by a law clerk. The case was Santa Clara Co. vs. Southern Pacific Railroad, and the law clerk essentially wrote his own words into the judge's opinion. The wording he added caused corporations to be considered as natural human beings, and gave them the same rights as humans under the 14th Amendment of the Constitution. This classification has been the entry point for some large businesses to influenced lawmakers to favor legislation that helped them to grow in power and size.
When it comes to incorporating, small business owners know that this legal process allows them to take on some risk without the danger of losing all of their possessions should the business fold. There are benefits that come with all types of incorporation, but they vary depending upon how your business structure is set up.
Many businesses begin as sole proprietorships. This usually means you are doing business under your own name, although you can do business under a fictitious name, the name of your business, as well. A sole proprietorship is not a corporation, and the benefit of this is that you will pay not corporate taxes, but instead you pay taxes on the profits of the business. The bookkeeping involved in a sole proprietorship is usually less complex than might normally be expected for a corporation. Your business profits go directly to the business owner in this model. This business structure is easily formed and dissolved legally, and you have the most control over your business decisions, because you have no one else to answer to.
When it comes time to incorporate, business owners usually do so in order to lower the amount of tax they must pay. As a sole proprietor, you may have to pay both the federal tax rate and a self-employment tax, which is in effect double taxation. Many business owners want to learn how to incorporate business structures because they also want limited liability. Sole proprietors can face unlimited liability if their business is sued, and it puts their personal assets at risk.
When considering incorporating small business, owners can select from the LLC, C-corporation, S-corporation, and even non-profit status. For the most information on how to incorporate business, owners should look into each of these formats to see which is right for them.
Wayne Hemrick provides services for incorporating small business. In this article, Wayne addresses the questions of how to incorporate business entities and why incorporate a small business venture.
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