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Old 01-12-2008, 09:33 AM
 
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We have been trying to get a straight answer out of someone, anyone. Small business, owner, one full-time employee. Currently a sole proprietorship is there a good reason to become incorporated? I understand the legal aspect of someone being able to sue you personally as a sole prop. but other then that is there any reason at this point to become a corporation?
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Old 01-12-2008, 10:10 AM
 
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I have several S-corps. Relative to your personal taxes, an S-corp is taxed at the same rate as a sole-proprietor. Tax deductions seemed comparable when I looked (15 years ago). In my state (TX), S-corps pay state tax, property tax, employment tax; the latter two are same for SPs; SPs probably don't have state tax in my state since there's no personal income tax. Check with your state tax collector. (Trivia: state tax in TX is called "franchise tax" although it has nothing to do with franchising.)

The liability protection from an S-corp is limited; i.e. an attorney may be able to "pierce the corporate veil". At the least, you have to maintain your good standing (paperwork, taxes) and have to keep your personal business totally separate. You also have to remember to remove any equity on a regular basis.

If the only advantage of an S-corp to you is the limited liability, consider a hefty insurance policy with an umbrella. It may be just as good and cheaper in the long run. But beware that insurance policies may not cover all of potential liabilities of a business: ex. damage to a customer site, alledged slander, wrongful termination, etc.
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Old 01-12-2008, 10:33 AM
 
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If you look at all of the costs ... initial filing, registration, accounting, taxation, and ongoing paperwork and costs ... that are part and parcel of being Incorporated, it's a loser compared to being a sole proprietorship.

For a small business, the principal benefit of the corporation is the creation of the corporate shield if what your business does has some risk exposure to it ... product liability, service liability, etc. Even at that, it's not an absolute barrier to being personally sued as an officer/owner of the corporation along with the corporation. A determined lawyer with a "case" against your company will try to get through that corporate "shield" for your assets ... even if it's not a successful attempt, you'll still be paying the dollars for your defense. In today's litigious world of jury trials, don't count on it being for sure that your corporation will totally shield you from personal responsibility.

Additionally, if you are in the "hard goods" line of business & services, you'll not be able to avoid personal responsibility for your corporate business debts. Many people think that a corporation will shield them from personal responsibility for business debts, and misuse this risk to avoid paying debts. For a sharp supplier, it doesn't work.

In my rep business, every one of the manufacturers I work for has a standard purchase order/line of credit agreement for the credit extended which require the buying corporate officers and principal owners to individually sign for personal responsibility of any balance owed for goods shipped (plus any costs of collection and interest on the balance at high rates). On larger shipments, they even require "pledging" of personal assets to assure that they have recourse set up in advance should the buying corporation default.

That comes in handy for the manufacturer/supplier. Last year, we had a contractor, operating as a corporation, decide to "walk away" from a project (and his life in general, it appears) while owing us over $100,000 for products. My supplier was able to "lien" the fellow's house immediately for the 90 day old debt (terms were 2% net 10), and we got paid. A number of other suppliers got stuck for well over $250,000.00 and are now having to sue the project owner for the materials installed on the project ... and the project owner is able to show he made interim progress payments which should have included those goods, so he's paid for the stuff. The result is that the legal fingers are pointing back at the contractor ... and he's got no assets left to pay anybody else.

There may be other factors for setting up a corporation which are of value to you, however. Such as estate planning for a business, where stock ownership and company control can be very precisely defined. But once you get into these areas, you are already working with a tax/estate lawyer, advisor, and accountant .... aren't you? If you aren't, you should be. Everybody's small business situation is unique .....
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Old 01-12-2008, 10:45 AM
 
20,793 posts, read 56,031,105 times
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Quote:
Originally Posted by aaauger View Post
I have several S-corps. Relative to your personal taxes, an S-corp is taxed at the same rate as a sole-proprietor. Tax deductions seemed comparable when I looked (15 years ago). In my state (TX), S-corps pay state tax, property tax, employment tax; the latter two are same for SPs; SPs probably don't have state tax in my state since there's no personal income tax. Check with your state tax collector. (Trivia: state tax in TX is called "franchise tax" although it has nothing to do with franchising.)

The liability protection from an S-corp is limited; i.e. an attorney may be able to "pierce the corporate veil". At the least, you have to maintain your good standing (paperwork, taxes) and have to keep your personal business totally separate. You also have to remember to remove any equity on a regular basis.

If the only advantage of an S-corp to you is the limited liability, consider a hefty insurance policy with an umbrella. It may be just as good and cheaper in the long run. But beware that insurance policies may not cover all of potential liabilities of a business: ex. damage to a customer site, alledged slander, wrongful termination, etc.
We have state income tax here, MN, so that is probably no different. We have good insurance policies for E/O, umbrella, etc. So basically there isn't really any real advantage to one or the other at this point it seems.
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Old 01-12-2008, 10:49 AM
 
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Yes, we have a lawyer & an accountant but neither have been able to say go this way or that so we were trying to find out if they were worth their fees or if we should find someone new or if there really isn't a difference so they really can't say one way or another.
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Old 01-12-2008, 11:09 AM
 
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If your accountant can't tell you of the costs/advantages/disadvantages of your specific situation while having your current financial picture in hand, you don't have much of an accountant ....

Don't mean to be nasty about this, but that's all the information anybody would need to quantify your options from a financial standpoint.

Your lawyer should be able to analyze your exposure/risk situation and advise you of the benefits ... if any ... and their costs (which there will be!) in your specific business. Absent a real overriding need to buy that corporate umbrella situation, it's not worth it to you for a one person shop/business.
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Old 01-12-2008, 11:53 AM
 
Location: Assisi, Italy
1,845 posts, read 3,972,619 times
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Quote:
Originally Posted by golfgal View Post
We have been trying to get a straight answer out of someone, anyone. Small business, owner, one full-time employee. Currently a sole proprietorship is there a good reason to become incorporated? I understand the legal aspect of someone being able to sue you personally as a sole prop. but other then that is there any reason at this point to become a corporation?
If you have adequate insurance, the added protection afforded by the corporation is just an illusion. You will be sued personally anyway. both sides would bicker endlessly about piercing the corporate veil.

At your level, the corporation is just another mouth to feed and worse, if you are not a sub s, you will have a double taxation issue. You will have two tax bills, two sets of accounting, two returns etc.. But some people find it an ego boost. I know this one guy here where I live that has set up a corp in the Dutch Antilles just because he always wanted one.

Focus on growing your business.
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Old 01-13-2008, 07:12 AM
 
20,793 posts, read 56,031,105 times
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Quote:
Originally Posted by sunsprit View Post
If your accountant can't tell you of the costs/advantages/disadvantages of your specific situation while having your current financial picture in hand, you don't have much of an accountant ....

Don't mean to be nasty about this, but that's all the information anybody would need to quantify your options from a financial standpoint.

Your lawyer should be able to analyze your exposure/risk situation and advise you of the benefits ... if any ... and their costs (which there will be!) in your specific business. Absent a real overriding need to buy that corporate umbrella situation, it's not worth it to you for a one person shop/business.

Our accountant is ok when it comes to the numbers side of taxes, etc. but some of the more finesse issues is what we are going back and forth on about keeping her. It sounds like we should just stay with what we have now. It is one of those 'she came highly recommended but we aren't totally thrilled with her types of deals. We will probably give her one more year and then if we aren't satisfied find someone else. We have only been working with her for about 9 months.

Thanks!!
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Old 01-13-2008, 02:08 PM
 
Location: Marietta, GA
857 posts, read 4,600,104 times
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Quote:
Originally Posted by golfgal View Post
Our accountant is ok when it comes to the numbers side of taxes, etc. but some of the more finesse issues is what we are going back and forth on about keeping her. It sounds like we should just stay with what we have now. It is one of those 'she came highly recommended but we aren't totally thrilled with her types of deals. We will probably give her one more year and then if we aren't satisfied find someone else. We have only been working with her for about 9 months.

Thanks!!
Every year my New Year's resolution is to find a new accountant. She recently gave me such bogus info about handling the taxes on my son's estate that I knew it was time to stick to my resolution, and so I have. If you keep questioning yours just pull the trigger and get it over with. You will sleep better.
I am no accountant so take what I say with a grain of salt if an acct or atty tells you different, but I have a partnership (same tax treatment as a sole prop.) and I set up an LLC for it. Like everyone above has said, if someone wants to go after you they will go after you. A Limited Liability Company probably doesn't protect you that much, but it doesn't hurt either. There is no double taxation, and depending on what kind of business it is it can be very handy. For instance, one of my LLCs is strictly for owning rental property. When I used to own them in my name my tenants would give me a sad story and make crocodile tears and I would leave with half the rent. Now that I am simply "an employee of the company" rather than the owner I can be sympathetic to their tale of woe but tell them that if my boss doesn't get the rent then he will start the eviction process. It's amazing how quickly they find the other half of the rent.
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Old 01-14-2008, 01:53 AM
 
Location: We_tside PNW (Columbia Gorge) / CO / SA TX / Thailand
26,135 posts, read 43,883,383 times
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You can get the liability protection for ~ $300 with an LLC, (but no tax benefits). If only two members in LLC (married) it can be taxed as a 'flow-through', same as sole Prop. If more than 2 partners, it will be a partnership, or you can choose to tax it as a corp if you elect this at the formation of the LLC (bit more hassle -issue shares and stiffer record requirements and distributions.)

From my limited knowledge...The only significant 'tax benefits' from a corp is the ability to pay medical premiums from pre-tax Corp income , but... the hassle is that the corp will be taxed on earnings AND your income from the corp will be taxed as wages too. Also there are advantages to holding appreciable assets OUTSIDE a corp to avail Long term capital gains. This is why lots of family companies (corps, LLC, and Sole) hold real property (office / farm / factory) in an LLC or as married couple, and lease it to the business. Rent is a legitimate expense for the business, (but rental NET income will be taxed). Property can appreciate and later be sold under the shelter of Long term Capital Gain. AFAIK, a corporation does not get a LTCG benefit.

Someone mentioned that if earnings are less than $250,000.00 a corporation might not be worth the trouble... each situation will vary, as will the taxes from the 'new' congress. I was also advised it is very hard to 'go-back' from Corp to Sole, as everything would have to be reconciled within the Corp identity. Can't stress enough that you need to keep a Corp and LLC totally separate from personal finances / activities / assets. "co-mingling" will sink the Corp / LLC boat.
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