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Why You Might Want to Incorporate Your Small Biz

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    BERLIN - JULY 05: A worker registers supporting documents for legal disputes, most of them related to Germany's Hartz IV unemployment benefits, in the mail room at the city's Social Court on July 5, 2010 in Berlin, Germany. Berlin's Social Court recently announced it had received the 100,000th legal claim relating to Hartz IV since 2005. The claims are filed by people who receive Hartz IV benefits and who charge authorities have made a mistake in the benefits issued. The most common topics of dispute are denied payments for rent or heating costs, demands by authorities for a return of benefits paid or denials of benefits once a claimant starts part-time work. The number of dispute claims has been rising steadily each year, and though the city now has a total of 66 judges working to process the cases, there are over 38,000 cases still open. (Photo by Sean Gallup/Getty Images)

    Small business owners, should you incorporate or not?

     

    There are arguments for both.

    You could skip the legal fees, the biggest argument against incorporating for a new business. Or, you could risk your delivery driver crashing into a sidewalk, and lose your home.

    If you do decide to incorporate, any claim for damages would be against that individual and his employer, your corporation, not the shareholder of that corporation - you.

    Say you don’t own a business that has any physical risks. Freelance writers and accountants likely aren’t going to get a dangerous keyboard injury. But they do enter into contracts on behalf of the business. Example: A customer feels that your company's performance has not met the contract provisions and decides to take legal action. If you are incorporated, any claim would typically be against your company, not you personally.

    "The primary reason is to protect personal assets from creditors of business,” says Ari Flemenbaum, a business and corporate law attorney with Chicago’s Griffin & Jacobson LLC. “Obviously it doesn’t make sense for everyone, but for independent contractors, preventing identity theft it’s a good idea.”

    “It costs very little,about $250,” he adds. “Compared to the time, money, and effort - we’re in a very litigious society. Small businesses need to protect their personal life from their business – not to mention the tax issues.”Incorporating and electing Subchapter S status may reduce your taxes.

    A Subchapter S corporation is treated like a partnership as a flow-through entity. All corporate income, after deducting any salary paid to you, is taxable as dividends, not subject to payroll taxes.

    Had you not incorporated, all income, both that salary and the income of the corporation after the salary deduction, could be subject to payroll taxes.

    But your salary must be “reasonable” in the eyes of the IRS. Today, most people who incorporate do so for limited liability purposes. They need to protect their personal assets from creditors, especially given the litigious nature of our society.

    Their advisors have told them that corporations and limited liability companies give them limited liability.