You can find many informative articles on the internet detailing the reasons why you should incorporate your business. But one thing seems to be in short supply, and it’s articles that detail the reasons why you shouldn’t incorporate a business.
Of course incorporating a client’s business is lucrative to me, and incorporations make up a large portion of my practice, so it might seem like I’m shooting myself in the foot but I should tell you why incorporating a business might not be right for you.
The number one reason for not incorporating a business has to do with the Franchise Tax Board. In the State of California businesses have to pay an annual Franchise Tax Board Fee of $800.00. That’s a large chunk of change in taxes that a new company will be forced to pay, even if they don’t make a dime of revenue. I had a client come to me with $1200.00 of revenue for the entire fiscal year of 2014. She had to pay $800.00 to the government and only receiving in return some liability protection. She incorporated her business as an LLC because she believed that’s what she needed to do to be successful. Her attorney simply drafted the papers she requested and she incorporated her business. She didn’t realize that incorporating would an add an annual cost of $800.00 per year, regardless of whether her business was successful or not. Eventually I helped her dissolve her company, and go back to running her business as a sole proprietor, where she is much better off right now.
Liability protection is one of the most important reasons to incorporate your business – sometimes the most important reason. But a small business owner that might not be ready to incorporate their business can still protect their assets without incorporating. They can protect their business and their personal assets with good professional insurance policies and well drafted contracts. And ultimately that small business owner can put that $800.00 toward greater use by fulfilling another of the business’ needs.
Sometimes incorporating your business can be the wrong move for you: consult with a CPA before incorporating your business. They’ll help you decide which entity is best suited for your business.
If you have any more questions about incorporations or business matters in general, feel free to contact my office at 1-844-695-1487 or email me at firstname.lastname@example.org, and we can discuss the issue further.
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