Been thinking about incorporating your business or changing to an LLC? There are lots of good reasons to make the switch and although you can do it at any time of the year doing it at the beginning makes things just a little bit easier.
The accounting switch makes for a cleaner break if you do it at the start of the year. And while the bookkeeping for a San Diego corporation isn’t that different than for a sole proprietorship or partnership there are some changes and differences that need to be made.
If you aren’t sure if it makes sense for your give us a call and we can run the numbers for you and see if the decision becomes obvious- a lot times it does. If your situation puts you more on the fence then we can discuss the pros and cons as they apply to your particular situation.
You can deduct losses for as long as you have them. As a sole proprietor, you can only turn a loss for so long. Three years in a row, to be exact: you can lose the ability to deduct certain losses on your taxes if you fail to show a profit during three of the last five tax years. If 2012 will be your third year in business (or more) double check your 1040 Schedule Cs – if it looks likely that you will not turn a profit, you run the risk of seeing your business classified by the IRS as a “hobby.” And guess what – hobby losses are more limited than business losses. If you reorganize into a formal business entity, you can continue to show losses without risking deductions.
A formal entity give you more tax flexibility. There are many tax reasons to move to a formal entity – depending on the entity you choose. They include:
- A corporation can offer retirement and medical plans along with greater retirement and life insurance contribution limits than a sole proprietorship or partnership.
- There are no limits or restrictions on the amount of capital or operating losses that a corporation may carry forward or backward to other tax years.
- With a corporation, only salaries (and not the entire profits of the business) are subject to payroll taxes. All income outside of a formal business entity, on the other hand, is subject to self-employment taxes. As of 2011, the combined tax rate is 13.3% on the first $106,800 of income.
A legal business entity lets you keep the business going. A sole proprietorship or partnership terminates when an owner retires or stops working, but a corporation or an LLC keeps going. A legal business entity can live on indefinitely until it sells or transfers ownership, merges with another business or shuts down. This is particularly important if you want to keep a family business going for generations to come.
A legal business can limit your liability. A legal business entity can protect your personal assets against liability for business debts. Regardless of the time of year, limited liability is always a great reason to formalize your business. Take a look at your personal and business situations; both are relevant to making the call here. The status of your company – its growth, customer base and potential liability – and your personal finances should all factor into your decision.
A formal business entity can make you look more “legitimate.” Even though this is not a legal reason, many entrepreneurs find that a formal legal business entity gives a little gravitas to a business. It tells their customers “I’m taking this seriously.” For many, taking the step from a sole proprietor to a shareholder makes entrepreneurship real.