Should You Incorporate?
By Rob Jupille
You’ve been in businessfor a number of years, and you’re doing pretty well. You’re at dinnerwith friends and somebody says that, at this point in your career, youshould really incorporate because it protects you from liability andprovides tax benefits that you can’t get if you’re unincorporated. Doesincorporating at this point make sense for you? While forming an Scorporation or LLC may make sense, there are issues that will affectyour decision one way or the other.
Disadvantages of Incorporating
Whilemany people think that there are separate tax benefits for Scorporations or LLCs, the fact is that there are very few deductionsthat are allowed for S corps or LLCs that aren’t allowed for soleproprietors. In fact, if your corporation is profitable, you’ll have topay yourself a salary and pay both halves of the Social Securitypayment (employer and employee). And, while you’ll get a credit for theemployer portion, you still have to lay out the cash and then get arefund when you file your taxes. You’ll incur costs to set up your newcorporation, somewhere in the neighborhood of $2,000. Each year, you’llhave to do two income-tax returns: one for your corporation and one foryou as an individual, which would increase your annual costs of filingyour taxes. Finally, there are generally record-keeping requirementsfor a corporate structure that will cost you either time or money, orboth.
Why Incorporate or Form an LLC?
For our clients in theentertainment business, the decision to incorporate is less one ofasset protection or tax savings, which are both importantconsiderations, as it is one of helping our clients with theirretirement planning. For example, when one of our first below-the-lineclients came to us, he was on a project for a studio that would onlypay him as a W2 employee, not a 1099 contractor, even though he was infact an independent contractor. The result was that, although he wasnot eligible for the studio’s 401(k) due to his independent nature, hewas still limited to a $4,000 per year IRA contribution because all ofhis income came in the form of salary. By forming an S corporationhowever, the studio would gladly pay his corporation for the work hedid, converting his income from salary to self-employment income, thusallowing him to put as much as $44,000, or 11 times as much more money,per year into a new SEP-IRA.
The decision toincorporate should not be taken lightly as there are severe penaltiesfor not following the rules with regard to your corporation, and thecosts, even for an S corporation or LLC, are not insignificant. Afterconsulting your CPA, business attorney and a qualified financialplanner it may make sense for you to go down the path of incorporating.
Written by Rob Jupille