There is an incredible number of misconceptions and outright myths about incorporating a business. Some, though, are more costly than others. The best example of this is when someone incorporates a business thinking it will cut their federal tax bill or exempt them from state income taxes, only to find out it isn’t true. In this article, were going to run through some of the most common myths and misconceptions about incorporating your business. We’ll also share the truth about business incorporation.
Incorporation Protects You and Your Assets from All Liability
It is true that a limited liability corporation or corporation protects your personal assets. However, this doesn’t mean you can’t be held liable for anything. For example, a business owner who signs a contract is obligated to honor it. If a business owner personally guarantees a loan, your personal assets are on the line if you don’t make the payments. People can end up accidentally personally liable for debt when they sign their name and not the business name on legal documents.
Note that incorporation doesn’t eliminate personal responsibility. Defraud customers or fail to keep up with corporate compliance paperwork, and you’re personally liable as well.
You Should Only Incorporate When You’re Ready to Go to Market
Small business owners tend to avoid paperwork. They don’t want to waste time filing forms if they don’t have to, and they don’t want to pay the associated legal fees. The problem is that they’re leaving themselves vulnerable in the meantime, and liability issues can arise long before your product hits the market.
Fail to file the necessary paperwork when you start your business, and your business may never get off the ground when you land in a dispute with hired consultants or manufacturers. Conversely, incorporating early makes it easier to treat the sale of the business as long-term gains if you decide to sell your startup once it takes the product to market. The tax rates are more favorable than if the money was taxed as ordinary income.
Getting a Business License or Filing My Name is Enough to Incorporate
You may officially start your business by registering the name and getting a business license, but this doesn’t make you a corporation with the associated liability protections. That can only be done by filing the Articles of Incorporation & Articles of Organization. You want to file this paperwork before you open a business bank account, sign contracts or apply for business loans to limit your personal liability and assets from that of the business.
Incorporation Reduces or Eliminates Taxes
When you incorporate in a state, your business will typically pay those state level taxes in addition to federal income taxes. Incorporating in Nevada means you won’t have a state income tax since Nevada doesn’t have one. However, state taxes may still be due. If you incorporate in Nevada and have operations in California, you’ll still have to pay state taxes on income earned in California. And you may not want to incorporate in a low-tax state if this costs you enhanced liability protection.Startups and small businesses need to understand the facts about incorporation so that they don’t expose themselves to legal liability or expensive mistakes on their taxes. Understand the benefits and obligations that come with legal protection strategies before you incorporate, and get it done as soon as possible.