4 Tips for Choosing the Right Method of Incorporation for Your Startup
So, you’ve decided you’re going to pull the trigger on a startup idea you’ve been considering for a while and you’re finally ready to make the endeavor official by incorporating your company in the state it’s going to be based in. Having that initial ambition to get the show started is great, but you don’t want to be too overzealous to the point of rushing past the due diligence involved. Here are a few tips to consider when choosing a method of incorporation for your startup:
1. Opt for an LLC for Minimal Risk and Liability
If you’re still at the stage of wondering “what is a corporation” and you acknowledge that you don’t yet have any advanced business acumen, opting for a Limited Liability Corporation (LLC) would probably be your best move. As the name implies, an LLC limits the personal liability that the company’s owners would face in the event of losses, lawsuits, bankruptcy, and other negative outcomes. This is usually the best option for first-time entrepreneurs who have never incorporated before and want to minimize risk and hassle.
2. Opt for a Sole Proprietorship if You’re a One-Person Company or Freelancer
If you’re just offering a service as a freelancer or operating as a one-person company with no intention of ever hiring any employees, then the easiest method of incorporation would be the sole proprietorship. With this stricture, paying your taxes will be similar to the tax filing process that you face when having a regular job, so you won’t have to make any significant adjustments if you’re quitting your day job to become a sole proprietor.
3. Opt for an S Corporation to Take a Salary
If you’re the owner of an LLC, you would take an owner’s draw to pay yourself. If you form the company as an S Corporation then you could take a set salary as well as an owner’s draw. This is a better option for experienced entrepreneurs who foresee the need to do a high volume of business, hire numerous employees, and take daily involvement in the operation of the company.
4. Consult with an Incorporation Expert or Registered Agent Before Making Your Decision
With so many factors to consider, and with laws and regulations varying from state to state, the safest and most informative course of action would be to consult with an expert. That way, you can describe your business goals and receive bespoke advice that is applicable in your region.
Choosing the Right Method of Incorporation Will Have a Huge Impact on Your Tax Filing Process
In closing, it’s important to understand that the method of incorporation you choose for your business will play a direct role in the ongoing liabilities, risks, requirements and tax obligations that the company will face in the long-term. Thus, it’s absolutely imperative that you take the time to do your research and consider all possible options before making a decision in this regard.
