Should I Incorporate?
Do you need to incorporate your business? Perhaps I should look back to when I was asking myself that question. The answer for me and my business was yes and yes. In this area, I can only explain what I’ve learned in my journey since owning my own businesses and what has been right for me. Let me preface this by saying I am neither a tax professional or legal professional which is why I can’t make this decision for you, but it’s my hope that by sharing my story it will help you on your path to making your decision. I own and operate an Information Technology support and consulting business. Working on and with computers has been a hobby of mine long before it became a profession and long before I started my own business I worked as an employee in technical roles in several businesses. When I was still only a hobbyist at 16 years old and fixed the occasional computer of a friend, family member, or neighbor I didn’t feel the need to incorporate. These were people close to me that weren’t going to sue me and I don’t think the extra $150 / year I was making on a few side jobs was turning any heads.
Six years ago when I started advertising my business to the general public and taking on clients full-time I knew it was important for me to incorporate my business. Based on the advice I received from my attorney and my accountant, I would be protecting the assets, money, and property I owned as a result of my years of hard work as an employee. The options I had for incorporating were to fill out the paperwork with the State of New Jersey (where I live) to incorporate in NJ. I could also fill out an application for a Federal Tax Identification Number, which is like a social security number for a business and a few other applications for business licenses etc.
Another option would be to have my attorney or account open the LLC on my behalf. The advantage with this option is there is an individual or a small number of individuals that are doing the work and performing the tasks necessary to open the LLC. The disadvantage is that these professionals charge a high hourly rate. In some cases, you may find accountants and attorneys who charge a reasonable fixed fee or transnational fee for these services.
I chose to use LegalZoom to incorporate my business. LegalZoom allowed me to incorporate my business online in a simple self-service way at a very reasonable cost. They process many many thousands of businesses and are able to do this at scale and provide a lower cost service. LegalZoom also has a network of attorneys available to help answer any questions I had. I did have to make a few follow up calls throughout the process, but each time I was able to talk to a live person within a few minutes and was able to work through any issues.
Through conversations with my accountant my company ended up being incorporated as an LLC from a legal standpoint and was taxed by the IRS as an S-Corporation. What does this mean? In my case, this meant that I had a separate business checking account and business credit card, which I think is always a good idea. By electing as an S-Corporation I was required to file a corporate tax return with the federal government and since I was an NJ corporation I also had to corporate business return with the state of NJ. This also meant that I had to be an employee of my company and set up payroll and pay myself a salary. I used a payroll company called Gusto.
In order to make sure my tax returns were accurate it was important to have accurate accounting records. I could have kept track by entering all of my expenses and income in a spreadsheet. I instead chose to use Quickbooks Online to automatically connect to my bank and credit card accounts and track expenses. I also used Quickbooks to invoice my customers and accept credit card payments. My payroll company, Gusto, also automatically connected to Quickbooks and tracked payroll related expenses.
My company was originally a cloud software company. I had a startup idea and was looking to get outside financing and funding to develop my software product. A long story made short, the funding fell through in the 11th hour and I pivoted and became an IT support and consulting business. After a few years, I realized that the name of the company really was more appropriate for the software company I had originally intended. I also realized since I was the only person and thus the only employee there were a few things I could do to save myself some money. I ended up closing my original company and starting a new company.
My new company is named Rob The Computer Guy. There was no guessing as to who I was or what I did. Additionally, I decided to be a single member LLC that was a disregarded entity by the IRS. This meant, since I was no longer seen as an S-Corporation by the IRS I no longer needed to be an employee of my own company and no longer needed to be on the payroll. I saved about $500 in payroll expenses and a few hours a month of time spent doing payroll and bookkeeping tasks. This also meant I did not have to file a federal or state corporate tax return which saved me over $1000 in accounting fees with my accountant. I still have separate business bank accounts and credit cards. I still use an accounting system to automatically track income and expenses and invoice my clients. I file what is called a schedule C for my business expenses on my personal tax return for the state of NJ and the federal government. It’s definitely a simplified approach that works for me and I wish I had started there.
My accountant has explained that there may be certain tax benefits in the future by changing to being taxed as an S-Corporation. Essentially I would be able to take some of my earnings as a salary and some of my earnings as owner distributions aren’t subject to social security tax or federal income tax. However, this will require more tax returns to be filed by the accountant and the time and expense hassle of running payroll. For now, I’m keeping it simple.
Decisions to make
- Should you incorporate my business?
- What corporate structure should you use, LLC? LLC taxed as a C-Corporation? C-Corporation? Something else?
- Write down questions for your attorney
- Write down questions for your accountant
- Set up an appointment or with both your attorney and your accountant.
- Incorporate your business, on your own, with LegalZoom, or with a local attorney and or accountant.
- Open up a business checking account and credit card
- Keep track of your income and expenses using accounting software such as Quickbooks, or manually by creating a spreadsheet.
I highly recommend you get professional and legal advice from both an attorney and an accountant. Remember, for those who want to use LegalZoom to incorporate, they have a network of attorneys to provide advice and ask questions.
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