Benefits of Incorporating
Forming a corporation is a big step toward your success and the success of your business.
Chances are you've considered the key benefits to incorporating your business:
- Protecting your personal assets through liability protection
- Saving money on your taxes
- Reducing your chance of an audit
- Establishing credibility with your customers
The Corporate Advantage
As a sole proprietor, your liability for business debt is unlimited. Personal assets such as your home, personal bank accounts and other valued assets may be at risk.
What does this mean? It means that if your business experiences severe financial difficulties, creditors can take away your personal property such as your home, retirement savings, or any other asset you or your spouse own.
In our increasingly litigious society, it is becoming ever more important to limit your exposure and protect yourself from liability.
Forming a corporation draws a firm line between your personal and business assets, helping protect your personal assets from risks or debts associated with running your business.
If you are operating as a sole proprietor, you will be required to pay self-employment tax on your profit, currently at 15.3%.
If you set up a corporation for your business, only the salary you pay yourself is subject to self-employment tax. Depending on your situation, you may be able to save as much as 50% on your tax bill. Another tax benefit of forming a corporation is that select medical and childcare costs may be deductible, which cannot be deducted as a sole proprietor.
Reduce Your Chance of Tax Audit
Sole proprietors tend to be more likely to file incorrect returns (many are self-prepared), and tend to underreport revenue or over report deductions.
For these reasons, the IRS has audited a much higher percentage of sole proprietor tax filings than corporate filings in recent years.
In tax year 2005, a Schedule C filer stood a one in 33 chance of being audited. For S-corporations (or LLCs filing as partnerships), the odds were around one in 300.
This means that you are almost ten times more likely to be audited if you are a sole proprietor!
Establish Credibility with Your Customers
Separating yourself from the competition by establishing a professional identity helps increase trust and credibility with your customers.
Most businesses choose to incorporate to prove their legitimacy to both customers and suppliers.