Back to Ganoksin | FAQ | Contact

[Biz talk] Incorporated? and why?

Hello all, I do not post to often but I had a talk with someone the
other day and the topic of incorporation came up, how many of you
are incorporated and why? Pro’s and con’s?

Thanks in advance!

CreatedWithFire Studio’s

how many of you are incorporated and why? Pro's and con's? 

I am incorporated. The cons are it is somewhat expensive and a
nuisance to set up. The pros are that you can rent yourself property
and avoid some self employment tax that way. According to my CPA you
should pay yourself reasonable wages and if you accumulate profit
greater than your wages you can take that as a dividend, which is
also exempt from self employment tax. The downside of avoiding self
employment tax is that you will get less Social Security when you

Incorporation is supposed to protect your personal assets if your
business gets into trouble. I don’t hear much about jewelers getting
sued in anyway similar to what happens to building contractors or
other higher risk businesses. For me that was not sufficient
motivation to incorporate.

There are also advantages to being a sole proprietor. You should talk
to a CPA to find out if it is really best for you. There seems to be
a misunderstanding among many people who are not in business, that
you should always incorporate before you get started. You have to
remember that MOST people are NOT IN BUSINESS. One of the things that
keeps them from even considering being self employed is fear of
failure, liability and bureaucracy. Don’t take the advise of scaredy
cats who are not in business themselves. Talk to people in a similar
business and see what you can learn from them and talk to a CPA who
really knows the score.

Take time and ask around about a CPA. Find one that does small
businesses. If you end up with a CPA that handles medical office,
doctors and the like you may get pulled off in the wrong direction. A
CPA has to fit.


Bill, Deborah, Michele & Sharon

The primary reason to incorporate is to protect yourself.

Its not just risk of suit. If you are a sole proprietor and you run
up bills you can’t pay, yeah they can come after your personal assets
but remember also that the record of judgement would be in YOUR name,
meaning any business judgements would be on your personal credit
report for years.

Incorporating creates a new legal entity that is separate from
yourself. Businesses (suppliers, landlords etc) considering your new
corp for credit will still use your personal ratings for the
decision of whether to extend you(as a closely held corporation) that
credit or not but they cannot reach your personal assets in the event
of default unless you have been so careless about acting like a corp
that they can ‘pierce the corporate veil’.

It does cost more money to be a corp, both at filing and recurring.
The protection is well worth it if you assess your personal risk as
significant. Obviously we never believe we’re going to fail when we
start-up but its crucial to plan for that eventuality. Because it
happens, alot. I may sound like a broken record but planning for
disaster helps you avoid it. Think Titanic, lifeboats.

If you’re going to be in the jelly bean concession business I’d say
sole prop is fine. If you’re in the nation wide jelly bean
manufacturing and distribution biz then Inc, definitely.

But you should also look at LLC, limited liability company. This
affords you the protection of a corp but taxes you like a sole prop.
Your company doesn’t pay income taxes, just you. taxed once. Nice.

There’s lots more pro and con, really depends on the business and
the owner.

If I had it to do over again, I wouldn’t incorporate as a C Corp, but
go as an LLC. Better tax advantages, not double taxation.

David S. Geller

If I had it to do over again, I wouldn't incorporate as a C Corp,
but go as an LLC. Better tax advantages, not double taxation. 

Why not an S corp?

Richard Hart G.G.

I have a good accountant, so I don’t have to be one. Meaning that I
can’t and won’t try to explain the statement in detail. His advice in
our discussions of this topic is that incorporating is for people
with a million dollars in gross reciepts and up. His meaning was that
the expense of it and the different tax position is MORE expensive
until you reach that level. In a nutshell, it’s not cost effective
until a certain level of money is flowing, or there is real
expectation that there will be. I’m just passing that on, not
starting an argument. That was his advice, and I’d consult an
accountant on just that topic before contemplating it. His advice in
our very situation was, “No, you are better off, tax-wise, as a sole

Hi Tina,

We (my wife and I) are incorporated as an LLC, a Limited Liability
Corporation. We did this on the advice of our CPA and attorney when
we opened the retail store. We were a sole proprietorship when we
operated as a trade shop. I am not an accountant, so I can’t give you
all the details, but as I understand it, the main reason is because
it is advantageous for us from a tax standpoint. As Sam explained we
pay ourselves a base salary and anything over that is paid as a
dividend, without having to pay the self-employment tax (the
employer’s half of Social Security). There is also the protection
aspect, but as I understand it, that really isn’t much of an
advantage, as if we go belly-up, we are still personally on the hook
for all of our debts. There is some personal protection from
lawsuits, but those are mainly covered by insurance required by our
landlord, suppliers and customers anyway.

Both our accountant and lawyer have explained that we will at some
point probably be better off to convert to Subchapter S. The decision
is based primarily on income and there are a lot more details about
that type of organization conversion.

The cons as Sam explained are the higher cost (a one-time fee of
about $800 for us) and the need for an attorney to file and a CPA to
keep all of the tax preparations legal. Also, the return from Social
Security on retirement is lowered, because you show (and pay payroll
taxes on) a lower income. As I understand it, an LLC is kind of in
the middle between a Subchapter S corporation and a sole
proprietorship in a lot of ways. A bit less expensive to establish
and having a little less protection than a Sub. S, more than a SP,
with different tax laws for all three.

Check with an attorney and a CPA to find out what might be best for
your particular situation.


we pay ourselves a base salary and anything over that is paid as a
dividend, without having to pay the self-employment tax (the
employer's half of Social Security). 

I did this same thing for several years as a tax strategy. One
downside is that your income looks artificially low if you’re looking
to get a home loan or the like. I did ask a friend who was an
attorney for the IRS if this was a strategy that the IRS approved of.
His answer was that it was definitely in a grey area. My CPA had said
that he had several clients who had been audited by the IRS and none
had any problems. But the grey area comment made me nervous. It
bugged me enough that I stopped doing it, I don’t think it’s a
problem… it was just a comfort level thing.


The ‘grey area’ of incorporation is that many S corps fail to ever
keep records of business meetings. When the IRS comes calling, all
they see is a sole propriertor operating under the flag of an S
corp. Without ‘minutes’, its difficult to prove you are functioning
as a corporation. Been audited 3 times by state, twice by IRS. Been
there, done that.