Most people starting a small business do not sit back and decide whether to incorporate or take a partner. The owner usually starts the business as an offshoot of some hobby, interest, or opportunity. This is the birth of a sole proprietorship. We believe nearly every owner should at some time incorporate, for the tax, privacy and asset protection benefits. There are few if any good reasons that a small businesses should remain a sole proprietorship.
We will first list the reasons small business owners give for remaining a sole-prop. We then cover why you should always incorporate below.
Sole proprietorships are easy to start.
All that is required to start a sole proprietorship is to start doing something that brings in money. This can be selling a product, performing a service, or renting out space for others to use to live, store belongings, or work. The possibilities and opportunities are almost limitless. Not all are hugely profitable. If it is not your only source of income, it does not have to be. As soon as you make that first craft item and someone buys it, you are in business. Frequently, people start sole proprietorships without even meaning to start a business.
You retain complete control with a sole proprietorship.
Within legal limits, you can do whatever you want as the owner of your own business. You have the right to hire and fire employees. You can change what service you offer or product you sell on a whim. In a sole proprietorship, you can rent expensive office space or work from your kitchen as long as you do not violate zoning laws. As long as you stay correct with the IRS, you can do anything you want with the profits from your business without having to answer for it. You carry the business money in your right pocket, and your money your left pocket. If you want to switch them back and forth or take a daily payday, it is your prerogative.
Setting up a bank account can be done without having to get a federal ID number unless you hire employees.
Your social security number is good enough for almost all situations. Most employers that are sole proprietors find it easier to do their taxes with a federal ID, but it can be done without it. The bookkeeping can be as simple as maintaining your personal checkbook. You can make it more difficult if you want or need to for business growth.
The size of the business can be limited so that you can manage it easier.
While most business owners are going for size, many find it just as profitable and rewarding to stay within a certain size range. It gives them a good income without the problems of growing larger. This is especially true for sole proprietorships where the owner is the only employee. Some examples are a small barbershop or beauty parlor. Having only yourself to account to keeps many of the headaches away from business ownership.
When you have earned enough money or grow tired of the business, you can just stop.
Since you are the owner and often only employee, it is your call whether the business will continue or end as long as it is solvent. Many sole proprietorships end when the owner finds a better opportunity by working for someone else. You also can have the chance of selling the business at some point for a nice profit to a competitor or someone who wants a ready made business. This is always a good option if it presents itself. You can live on the money or look to start a new company in another field or area.
When a small service business is incorporated, records are more likely to be maintained by someone other than the owner. Each employee, including the business owner, draws a paycheck, tax records are controlled, and taxes are paid. Forms are filed on time and records of expenses are maintained and obligations met.
Year end tax forms are usually made out by a CPA, which is a "check and balance" for accountability. With this outside help, the owner is free to do his/her job with only a little supervision of records. In this atmosphere the small service business can grow and prosper.
A corporation or LLC is a business entity with assets completely separate from the owner. Thus, if legal suits arise, the company is liable, not the owner's assets. This is a huge advantage for incorporating a business or forming a LLC in today's "sue-happy" society.
Incorporation of a business lends itself to integrity with the business community at large. Having a Federal Identification Number (FIN) is almost a status symbol for a business. The cost of business incorporation is minimal. We charge $199.
The new tax laws offer many benefits for pass through entities. There are reduced marginal rates and new deductions. Tax savings can easily cover the cost of incorporation.
Maintaining the company after formation is easy. Wyoming only requires a $50 annual report and dissolution is easy if you decide the company isn't for you.