This is one of the most common questions that lawyers get when talking to entrepreneurs. “Should I Incorporate My Business?”
For many bricks and mortar businesses, the answer is an undeniable and resounding “yes”. Before an entrepreneur starts signing leases and opening bank accounts, they want to make sure that all of their legal paperwork is in order.
But for online businesses?
The answer isn’t always so clear.
Many online entrepreneurs start off as simple bloggers who are just trying to get some traffic to a website. They aren’t entering contracts or bringing on clients…
I mean, you’re just a guy or gal sitting in your pajamas and writing about something you are passionate about…
…so why would you need to incorporate?
Here are 5 reasons why you need to eliminate that way of thinking from your brain and start to get serious.
5 Reasons Every Online Business Needs to Incorporate
Every, and I do mean EVERY online business, blog, e-commerce store, or consultant with an online presence, etc. needs to incorporate.
And when I say “incorporate” I mean that you will need to pick an entity (LLC, S-Corp, etc.) fill out some paperwork, pony up some cash, and get your business legitimized.
Not in a week, not in a month, not after you are making some money…
No… You need to do it today. (Click here to download a handy cheatsheet to help you select the business entity that is right for you.)
When you go online and start giving advice with the hopes that something you say will be so valuable that someday someone might pay you for it, you are opening yourself up to getting sued for giving bad advice. Or let’s say that you start off well, but then things go south and you can’t pay your business debts. The creditor would sue you, and not your business.
In either of these situations, if you haven’t incorporated, you are putting your personal assets (i.e. your home, you bank accounts, your cars, etc.) at risk.
One of the biggest advantages to incorporating is the tax advantages that come with running your own business.
When you are an employee, you pay taxes first and get to take home what is left. But when you own the business, now you can legally write-off all sorts of deductions that you couldn’t previously, such as:
- Equipment, computers, office supplies, etc.
- Software used for the business
- Meals and Entertainment when business is discussed
- Travel expenses
- Cost of attending business conferences
- Marketing books, consultants, education, etc.
- Any other expense related to your business
And not only that but when you are just getting started, you can write off these expenses, even if you aren’t making any money. That means that you can take a loss on your tax return if the business lost money.
Remember when Donald Trump took that huge loss in the 90’s that kept him from paying taxes? This was how he did it legally.
But that’s not the only tax-related reason you need to incorporate. Many online businesses start off by pushing someone else’s products in the hopes of generating some money from affiliate sales. If this describes you, before you go applying to be an affiliate, you must obtain a tax ID number.
While you could provide your social security number, this will essentially add your affiliate earnings to your gross earnings on your 1040, adding to your tax liability. By incorporating and applying for an EIN, you can provide the affiliate program with this number so that they can report your earnings to the IRS under your business id. As a result, you can now take all the deductions referenced previously when you file your business tax return.
3. Segregate Your Expenses
Can you just pay for your business out of your personal bank accounts to start? Sure, but this will make things more difficult for you come tax season.
Some businesses opt to just open up a separate personal account. Again, this is an option, but not an ideal one. It’s too easy to start commingling business and personal expenses – which can lead to all sorts of problems and unforeseen liability.
Ultimately, you will need a business bank account. But you can’t get a business bank account until you have incorporated your business. So don’t wait – get it done now.
Once you form your business, you can put an “Inc.” or “LLC” after your business name. This will make you more credible in the eyes of your potential clients and customers. Not only that, but it will make you start to feel like you are actually building a business and not just a hobby.
5. Intellectual Property
If you wish to protect your intellectual property (i.e. your brand or product names) by filing a trademark application, you must do so in the name of your business.
If you were to make your “business” the owner of the proposed mark when you submit your trademark application, but you hadn’t actually incorporated yet, then the trademark application is void and you just wasted a lot of time and money.
I’ve also seen this happen with clients who filed a trademark application in their name as opposed to the name of the business. So be careful here if you are thinking about registering your trademark.
Other Reasons You Should Incorporate
These are the major reasons you should give some serious thought to incorporating your business, but they are by no means all of the reasons.
Here are some other reasons you might want to incorporate:
- You are considering getting a business loan or will be seeking capital from business investors
- You want to establish a credit score for the business so that you don’t have to rely on your personal credit score
- You can protect your business from your personal debts and obligations. The liability protection goes both ways if you manage this process the right way.
What types of forms can your corporation take?
I’ve discussed this a length in this blog post, but the three major forms that your business can take are:
- LLC or “Limited Liability Company”: This is one of the most common forms due to its flexible management structure and limited liability protection. However, you will need an operating agreement to make sure that the corporate veil cannot be pierced.
- S-Corporation: Coming in a close second is the S-Corporation. This entity will not pay its own federal taxes, but instead, it’s income/loss will “pass through” to the shareholders and get reported on their personal tax return.
- C-Corporation: This is the best option for non-US Residents who are looking to operate a business in the United States. This is also the best option for people who are looking to raise capital for and grow the business. However, there are numerous corporate formalities that must be followed.
Are there any drawbacks to incorporating?
Other than paying a filing fee and some annual fees to the secretary of state where you live, as well as some minor administrative hassles that come with forming a business entity, any possible drawbacks are more than made up for with the benefits of incorporating.
So if you haven’t incorporated yet, and you aren’t sure where to start – check out this free checklist we put together that will help you figure out which corporate entity is right for you.