Should I Incorporate My Business?

An important part of most people's estate plan should be to start and grow a business. There are just so many advantages to owning your own business. Many of those are discussed at other places on this site.

Business Group Meeting


But, assuming you are already "there," your first question may be: "Should I incorporate my business?" The answer is a definitive "yes!"

At least if that’s what you really mean. What I’m getting at is if you have determined that the activity you are considering is a business then there are many reasons you should incorporate it.

Of course, if it is really a hobby, then you should not incorporate.

So, how do you know if what you are doing is a hobby or a business? According to the IRS, the heart of the matter is whether you have a profit motive or not. If you intend to make money, it is a business; if not, it isn’t (although legally you are still required to report any taxable income).

Even if you lose money some years (and deduct those losses from your personal income through an S-Corp or LLC) as long as you are truly in business to make money (have a legitimate business purpose) you are considered to be in business. In fact, the IRS says that as long as your business reports taxable income 3 out of 5 years they will presume that you have a valid business.

Odds are that if you are here, reading this page, you are engaging or planning to engage, in some activity that you hope will make money – at least one day. Therefore, you are fully entitled to form a business entity and officially make it a business.

But, there is more you should consider.

First, it will cost some money to form a business. You can hire an attorney to do it for you. That will likely cost about $1000 for a simple business formation.

Or,you could use an on-line service (like to do it for you. That will cost less, but still a couple hundred dollars or so.

Or, you can do what I did and do it yourself. It’s actually very easy. So far I’ve established two businesses for myself – an LLC and an S-Corporation. Both were established in the state of Virginia. People often use search terms like "business incorporate virginia" -- so here's some info about how I incorporated my business in Virginia.

[If you are interested, here's some pros and cons of incorporating in Delaware.]

So, how did I form a VA LLC and S-Corp?

The first thing I had to do was pick out a name that wasn’t already taken. Virginia allows you to do a business entity name search on-line; so that’s easy enough.

I then had to file a simple form with the Virginia State Corporation Commission and pay a fee. The fee to make my business entity filing and form the LLC was $100. I think the fee for the S-Corp was $75. However, there is also an annual renewal fee that has to be paid. And that now is $100 for the S-Corp and $50 for the LLC.

So, you can see that in regards to state filing fees, at least in Virginia, the LLC is cheaper in the long term.

After you have your state corporation or LLC formed, you will then need to get a federal Employer Identification Number (EIN). This is a very important number. If you are going to make money off your venture, eventually, one or more of the people or businesses who pay you will require you give them your social security number or EIN number. They need this so they can report to the IRS where their expenses went when they file their taxes.

Also, if you want a business bank account or credit card, the bank will also require an EIN.

If you want to pay employees or contractors to do things for you, you will need to report those payments to the IRS and give the employee a W-2 at the end of the year. You would give the contractor a Form 1099. Either way, again, you need that EIN on the forms. [You can read about my experience with outsourcing at Outsourcing Advantages and Disadvantages.]

If you have employees you will also need to establish an account with a state agency that handles workers compensation and any other employee taxes.

If you sell merchandise you will have to establish an account with your state’s sales tax authority.

So, that’s an overview of how to form your corporation or LLC. If you haven’t done it before, it may seem a bit overwhelming. It really isn’t. Still, if you have no background in business formation or taxes and no desire to learn about it -- you may want to hire a CPA firm to handle all of that for you. Of course, again, that will cost money. But will save you lots of time and aggravation and allow you to focus on your business.

I actually have an advanced tax law degree and so this stuff should be easy for me.

Still, I look forward to the day that my businesses make enough money that I don’t have to fool with it. Filling out all the paperwork, filing it, keeping track of tax changes, etc is time consuming. Especially when you get into depreciation of business assets for tax purposes, etc.

This past year, I made a couple mistakes in my taxes, missed a couple deductions and had to file amended federal and state returns. What a pain! And, if I didn’t have a tax background I probably never would have caught my mistakes. I nearly didn’t as it was.

And those mistakes, alone, would have cost me close to what I’d pay a professional to take care of it all for me.

And, I have a strong tax background. If you don’t, I think pretty quickly you will be well served to contract this work out.

BUT, none of this corporate formation and tax filing stuff makes much sense to fool with if you aren’t making much, if any, money at all.

So, that is really the first judgment to make. If you do intend to make significant money eventually, and think you will, then I’d recommend you go ahead and incorporate now. That way as you develop your relationships with customers, suppliers, affiliates, etc – you can give them the correct business name, EIN, address, etc right up front. You won’t have to go back later and change all that.

But, if you aren’t sure if your venture will ever make much, then you probably are best served by simply treating it as a hobby and reporting any income on your personal taxes.

You may be asking: What are the benefits of incorporating my business? If so, you should also read: Benefits of Incorporation and Which Business Entity is Best?.

If your family will be involved in the business, check out Estate Planning and Family Business. If you own a family farm you will want to read farm estate planning

You also can read more about how I started this business at Best Low Cost Investment.

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--by Beth Heikkinen
Marquette, Michigan
I just want to thank you for this site. It answered my questions. I think many people that do research on the net take it for granted and when they find what they are looking for they forget "someone put time, money, etc into providing me with this information."

Thank you!

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