To Incorporate or Not>?that is the question

My advise is to go Sole prop. I'll qualify that though. If you have no employees and people don't come to your office the sole prop works great and its the easiest and cheapest to set up. Otherwise I'ld say either the LLC or S-Corp. would be good. The big difference is liability and insurance. For one person working by themselves their is no real tax bennifit to a corp. I'm not a tax pro though they may have different opinions but thats what they told me when I asked my accountant the same question. Art T.

I just went through the same discussion with myself and others well versed in business. I was at one time a sole-prop. I am now an LLC. I have no employees, no partners, I deal with contractors on a 1099 basis. The reason I changed to LLC is simple. Sole-prop leaves you at a considerable risk. Yes it is cheaper than going LLC, BUT all your personal assets are attached to your business as you ARE the business. So if your business gets sued, they can attach all your personal assets to the suit. House, car, clothes, furniture, etc.

An LLC is the lowest level of corporation, but has all the benefits. You get all the tax benefits of a large corporation but can still file as a sole-prop; AND your person assets are protected. That alone is worth the minimal cost of going LLC.

To learn more, visit: (http://www.llc.com)

I hope this helps.

In Washington state the filing fee for an LLC is only $195. Sure, sole proprietor requires no fee, but like Scott says, you take the risk (no corporate "veil"). Although like Arthur points out, risk varies according to your industry ...

As far as attorney fees (and yes, you save yourself money and trouble in the long run by forking it over now to an attorney), the cost of the documents for a single member LLC can be less than a multi-member, because you don't need an Operating Agreement (uh, there's only yourself to agree with :-)

About the corporate "veil"--you must follow all the appropriate rules and regulations for an LLC/corporation or your veil can be pierced. Be sure you know about what records must be kept, what meetings must be held, etc.

There are several Seattle-area attorneys who can help you--Will Wright and Mike Jacobs are two I've worked with who are savvy.

If your solo the corprate veil typically doesn't end up protecting you. I do recomend seaking with the attorneies. Ask yourself a question what might you get sued for? How am I protected in a law guit like that? Then you might have a better idea of what kind of protections you need. Art T.

Stop driving yourself crazy...Take a look at your possible liability...You are a realtor - What would someone sue you for?...If it's a remote chance, this should not be your focus.

If you are using a home office to meet clients, you really have to take a look at that situation - They can trip and fall...But, if you have an outside office, that is something else...

If you are working alone in the business and there is no-one else that could be associated with the business, incorporating at any level does not really protect you. Even if you follow all the rules and regulations . If I had a suit against you, I would argue that the company is simply an "alternate personality"...

But, don't harp on the bad things that could happen -Things do happen, but with a fair amount of caution, problems are avoided.

Instead look at what would be most convenient for you in recordkeeping, tax filing and developing credit and credibility.

Does your typical client feel that a sole proprietor is inadequate for their needs...Maybe the LLC after your name would help...

You'll have to keep accounting records one way or another...The question is if your expenses and tax filing would be conveniently done as some form of company (Subchapter S or LLC). And, your tax filings and financials may certainly look more credible to a banker or to other companies that you may want to develop a relationship with...

Also, should you eventually take on a partner, or sell the business, it would be more easily done in the form of a company.

Incorporating has other potential benefits beyond protection against liability. Talk to a tax attorney about it. It may cost you to set it up, but you may save way more in taxes by setting up a corporation.

I was a sole-proprietor for a long time, and just recently formed an S-Corp with my wife. The tax benefits for us, plus being able to get a group insurance plan is saving a lot more money each year than it cost us to set it up. It really shouldn't cost that much to set up in the first place.

Almost anything used by business can be written off in some way. You need to talk to an accountant about the specifics, but as an example, you can write off the mileage on your car that is specifically from business related driving. You don't need to be incorporated though for business related tax write offs.

Go up on http://www.filinginoregon.com and read the definitions of an LLC as opposed to an S-Corp. The definitions will be the same for Washington State. It appears to me that establishing yourself as a single person LLC will work best for you and the tax paperwork is simple and you can do it by yourself using TurboTax. I would definitely stay away from taking the office in the home tax deduction because it raises flags with the IRS and can cause you to be audited and that is a distinct waste of time and energy. Outside of that, again if you use TurboTax, it will step you through all of the possible deductions and will ask you all the right questions. Alternately, you can always use a tax consultant.

Good Luck

S-Corp made sense for us, but I realize that everyone's situation is different, and I'm certainly not an expert in this field.

I will say, I wish I'd done it sooner. Looking back I could've save a good chunk of change each year.

The only other things I can recommend, is make sure to pay all of your quarterly tax payments, and take every advantage of the great investment options out there for small businesses and the self-employed. I use an SEP, which really allows you to put a lot of pre-tax dollars away each year.

Of course you should not act until a CPA or tax accountant examines your particular situation, but . . . if you’re not concerned about the potential tax savings of a corporation , and there is even minimal liability concern, I would likely recommend an LLC. The fee is only $175. The application is easy. It's always good to talk to an attorney but don't let that stop you. Remember, a flawed LLC offers way more liability protection than a perfect sole proprietorship. Then just file your renewal each year. That's it. As a single member LLC, you are a sole proprietor except you have liability protection.

I'm amazed that people create corporations to save taxes when they were not paying taxes in the first place. If your business is operating at a loss or small profit, you don't have a tax problem. If you have significant income however, as a sole proprietor or single member LLC (they are the same for tax purposes), you will pay significant self employment tax and income tax . You should then look at an S Corporation to reduce your tax liability. I have a very short article explaining how this is done, Entity Choice (Saving Tax with S Corporations).

John Huddleston

Huddleston Tax Consultants

I have a great book that focuses on various tax deductions. I talk about your car for example. I don't deal with the various entities and this or that deduction if you have this or that entity, the way John does in his article, but it gives you a firm basis in understand basic accounting deductions, which would be very helpful to you. And the price is right!

I just listed a 1 hour event that addresses this subject (july 9 at noon). I'll go over the different tax implications of becomimg an S Corp, C Corp, LLC versus staying a sole proprietor. I'm limiting the event to 3 guest so we have time to address questions.

John

Take a look at line 58 of your 2007 1040 tax return (i.e. Self-Employment Tax). If this number is higher than you would like, RSVP for the 1 hour July 9 noon event and I'll explain how to lower your self-employment tax.

Looks like you've got plenty of good advice. We went S Corp (it only cost $50 to file in Oregon), and it has saved us a bundle because:

• we have group insurance
• there are many, many things that are legitimate biz expenses, that are being bought with pre-tax revenue.
• We don't pay taxes twice, like you do with a C Corp.

The LLC just didn't seem to make sense, but that was two years ago, and I'm not remembering the exact why- but our accountant made it clear to us.

Let us know how it turns out and why.

Mark, you are also saving self-employment tax, over an LLC or sole proprietor, assuming your salary versus profit distribution is structured correctly. I'm hosting another event on saving taxes by choosing the correct entity, on September 18th. I have two spots left.

Hi John,

You are absolutely correct- our accountant has us on payroll, and we're saving quite a bit on taxes that way, too. Good luck with your event!

Thanks Mark, For those interested, I will also discuss the issue of reasonable salary for S Corp owners at the 9/18 event. The following often repeated saying applies: Pigs get fed, hogs get slaughtered.

If you are going to incorporate, it makes sense to do it on January 1st. Thus, my event on entity selection and tax savings on December 5th is quite timely.

I read one of the posts above that suggested that Realtors are at little risk of being sued. I think that is true. I kinda smiled when I read it because I am representing a client who is bringing a case against a realtor for breach of duty, negligence, etc. Candidly, I don't think incorporating makes sense for most small businesses. The biggest liability protection for most professionals is a decent malpractice policy. I am also bringing a suit now to pierce a corporate veil. We will prevail. I can't emphasize enough that incorporating only offers liability protection if you follow the rules. I've also looked at the tax savings for corporations. Self employment tax savings is an advantage but only after "reasonable compensation" has been paid. John is right when he points out that these tax savings really only work when you are making a lot of money. When you are just starting out, it seems like that is hard. Trust me, I know. I am a small business person too.

Darol, I always tell clients to talk to someone like you when they ask about the liability issues. I only advise on the tax issues. Regarding your statement, "only offers liability protection if you follow the rules", what about creating an LLC that elects to be taxed as an S Corp.? Don't we avoid the corporate formalities that way? Is there much case law of piercing LLC protection in Washington? Thanks for you insights.

Hi, Pam. I don't know if you've checked out the US Small Business Administration or Service Corps of Retired Executives (SCORE) websites for advice on these issues. They offer a ton of information on all the different levels of corporation and can give you some preliminary advice before hiring an attorney or tax accountant. You might want to check out those websites before committing one way or another. Good luck with your decision!

Best regards,

Phyllis Harber-Murphy CAP More Than 9 2 5

John,

In Washington there are not different rules for LLCs than corporations (in terms of peircing). A Judge has discretion when ruling and clearly won't require shareholder meetings, etc but the other elements need to be followed. There has been real questions raised as to whether LLCs offer liability protection for this reason. We will do a much better job for our clients who engage in certain types of businesses, i.e., higher risk, by setting up more robust procedures, etc. I almost see the need for reviews or advisory assistance on an on-going basis. That is why I almost think that LLCs are over rated.

An LLC still offers personal liability protection, but can pass income straight through to members and has taxation options like being taxed as a corporation or LLC. It also does not typically need to keep detailed corporate minutes or hold formal meetings. Check out forming your LLC online.