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Why You Maybe Shouldn't Incorporate Your Small Business

posted 24 Feb 2013, 05:42 by Mpelembe   [ updated 24 Feb 2013, 05:42 ]
Why You Maybe Shouldn't Incorporate Your Small Business
Incorporating a small business sometimes delivers big
benefits. Liability always gets limited at least a little
bit. And often times, incorporating means the business
reduces its income taxes or the payroll taxes or both.

But incorporating creates some extra costs and headaches.

And some business owners--in spite of the
benefits--probably should not incorporate. Consider these
risks and headaches:

Headache #1: Payroll

If you currently operate your business as a sole
proprietorship and you're the only worker, or you partner
with one or more people and only the partners work in the
business, you don't have to deal with employee payroll.

When you incorporate--even if you or you and your partner
are the only employees--you do have to do employee payroll.
Which is a headache.

Payroll processing costs money. You need to regularly
prepare payroll checks and deposits. You also need to
prepare quarterly payroll reports for Social Security,
Medicare, state unemployment and workers compensation
insurance. And you need to prepare annual payroll reports
like W-2s for employees and the annual federal unemployment
tax return.

In some cases, you will also increase the payroll taxes you
have to pay simply because you've recategorized a sole
proprietor or partner as an owner-employee.

The headache of payroll means you need to be cautious about
incorporating a one-man business or a business staffed by
its partners. The time and money related to processing
payroll easily costs a thousand dollars a year--which may
eat considerably into the savings or benefits associated
with incorporating. Bummer.

Headache #2: More Complicated Accounting and Taxes

Incorporating also creates a second and related-to-payroll
processing headache: Incorporation means that the business
requires more complicated tax accounting.

A sole proprietorship gets to report its income and
deductions inside the owner's individual tax return on a
one or two page, very simple Schedule C tax form.

In comparison, a corporation actually requires its own,
separate tax return for the federal income tax and state
income tax purposes. The returns can easily ten or twenty
pages--which means the returns require much more work to

A corporation tax return also requires more tax law
knowledge--which usually means the small business owner
can't do the tax return him- or herself. The small business
corporation probably needs to have an accountant prepare
the tax return. And that's not cheap. A combined federal
and state corporation income tax return can easily cost
$1,000 or more when all is said and done.

Headache #3: State Registrations and Related Red-tape

One other incorporation headache must be considered by
small businesses considering the corporation option--the
darn paperwork.

Setting up a corporation automatically requires a certain
amount of paperwork and fiddling. On an annual basis, the
states in which the corporation operates also require
annual re-registration. In addition, corporations usually
require their shareholders, directors and officers to
conduct regular meetings and to maintain detailed records
of the items discussed at these meetings.

The work of registering and then annually re-registering
coupled with the extra organizational busywork mean that a
business owner shouldn't incorporate a business unless he
or she can confidently keep up with the study flow of

Summing Things Up

Can incorporation save your business taxes? Does
incorporation reduce your business liability? A resounding
"yes" answers both questions.

However, the tax saving and the liability protection costs
you at least one to two thousand dollars a year in extra
taxes. In addition, you'll have a lot more paperwork to
deal with.

In many cases, very small businesses--such as part-time,
hobby and home-based businesses--will not be able to
economically justify incorporation.

About the Author:

Accountant Stephen L. Nelson wrote the bestseller
QuickBooks for Dummies. He also edits the and web sites.