Advantages & Disadvantages for an Individual to Incorporate
When you work as a self-employed individual, you can choose several different types of business entities for yourself. Many people stick with working as a sole proprietor, but you could also incorporate your business. Incorporating your business could potentially provide you with some benefits, such as saving on taxes, but at the same time, it comes with a few headaches.
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Tax Savings
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One of the advantages of setting up a corporation is that you can save money on taxes. When you work as a sole proprietor, you have to pay self-employment tax on all of your income. If you set up an S corporation, you can pay yourself a salary, which requires you to pay the employment tax on amount. Then you can simply get the rest of the money that is made by your company as part of profit sharing. This money does not have to have self-employment taxes taken out of it.
Limit Liability
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Another prominent reason that you may want to consider incorporating your business is so that you can limit your personal liability. When you work as a sole proprietor, you open yourself up to liability relating to your business. If you wrong someone in some way through your regular business activities, he can potentially file a lawsuit against you. If you are incorporated, he can only come after the assets of your business and would have to leave your personal assets alone.
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Set Up
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One of the drawbacks of incorporating your business is that you have to go through the process of setting it up. This involves time and effort on your part to get the job done. You will have to go to your state office and fill out paperwork that allows you to set up a corporation. Once you do this, you will also be expected to pay a filing fee with your state. By comparison, you do not have to do anything to set up a sole proprietorship.
More Paperwork
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Once you have your corporation set up, you will have to do more paperwork than you would with a traditional sole proprietorship. For example, you will have to complete a tax return for your business, which adds to the time requirements around tax time. If you want to be treated as an S corporation, you will need to check the appropriate section on your corporate tax return. You will also have to keep everything separate between your business and personal records.
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