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October 2010

Q and A: Should I Incorporate My Business?

 

incorporate

By CARRIE MYERS

Q: I own a personal training and group fitness studio. I currently operate it as a sole proprietor, but am wondering if I should incorporate it instead?

A: This is a question anyone who is self-employed is likely to consider at some point, and one that can potentially cost or save you money over time.

On the surface, incorporating your company may sound necessary—or in the very least, tempting—since it removes the liability from individuals to the corporation itself. This protects your personal assets should someone sue you. According to business.gov, other benefits of incorporating include:

  • Ability to Generate Capital. Corporations can raise capital for their business through the sale of stock.
  • Corporate Tax Treatment. Corporations file taxes separately from their owners. Owners of a corporation only pay taxes on corporate profits paid to them in the form of salaries, bonuses and dividends, while any additional profits are awarded a corporate tax rate, which is usually lower than a personal income tax rate.
  • Attractive to Potential Employees. Corporations are generally able to attract and hire high-quality, motivated employees because they offer competitive benefits and the potential for partial ownership through stock options.

Dana Robinson, M.A., J.D., founding partner of TechLaw, LLP in San Diego, Calif., law professor at the University of San Diego School of Law, and author of booklet and iPhone app, The New Business Quick Start Guide, says there are two needs that incorporation addresses that you can use to determine whether it is the right route to go for your business: diverse ownership and limited liability.

“Before you incorporate, you should focus on these [areas], and not only on whether to incorporate,” explains Robinson, “but with regard to which type of entity to choose as your corporate form.

“In looking at the first issue,” Robinson continues, “we need to analyze whether you will have a diversified ownership (meaning, are there other people who will be involved in your business?).”

  • Will you have partners?
  • If you will not have active partners, are there any investors?
  • What role will your investors play?
  • If you will not have investors, will you need investors down the road?
  • Is your spouse a co-owner?

If you’re going to have co-owners, partners, shareholders or investors involved, says Robinson, there are a host of issues that need to be addressed—and it’s recommended you get professional counsel from an accountant or business attorney. If you’re going to be the sole owner and only investor, the matter is more basic.

“Remember the two questions: Are there diverse owners and do I need limited liability? If you are the sole owner, then you do not need a corporate entity for the first issue,” explains Robinson, “and the [liability issue] can be addressed with insurance.”

According to Robinson, if you are the sole owner, liability insurance is enough to protect your personal assets. This will save you the time and expense of forming and maintaining a corporate entity.

“The biggest ‘con’ to forming a corporation,” says Steven Thayer, M.B.A., J.D., founding partner of Handler Thayer, LLP in Chicago, Ill., “is the cost associated with organizing and maintaining a corporation.”

This cost can often run in the thousands of dollars. On top of that, there is more paperwork and some potentially sticky tax tricks, such as the possibility of double taxing, since sometimes both profits and dividends paid out to shareholders get taxed.

If you want more liability protection than what a sole proprietorship offers, but don’t want to go to the trouble of forming a corporation, Thayer suggests looking into becoming a limited liability company (LLC), which keeps it more simplified come tax-time when compared to a corporation.

If after receiving professional counsel on what type of entity is best for you, you decide to form a corporation, Robinson suggests filling the paperwork out yourself if your state has an online form. “If not, then services, such as LegalZoom and Nolo Press are good. And some of them are very affordable, as well.”

When it comes to setting your business up, follow the same advice you give your clients: plan ahead and prepare. Educate yourself on the laws and what will work best for your particular situation. Like your clients who jump into an exercise plan unprepared with no goals in mind, waiting until something happens to find out if you’re sufficiently covered could potentially put your work and personal life at unnecessary risk.

_____________________________________________________________________________

 

myers

Carrie Myers has a bachelor’s degree in exercise science and has been a freelance writer for more than 11 years. She is the author of the award-winning book, Squeezing Your Size 14 Self into a Size 6 World: A Real Woman's Guide to Food, Fitness, and Self-Acceptance and presents, teaches and trains in N.H. and Vt.

 


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