It is never too late to incorporate your business, whether you have a home-based business or an office or storefront. Incorporating can mean tax breaks, loss deductions and an ensured longevity of your pride and joy. After all, you did start a business for a reason, right?
Home-based business owners often struggle with the option to incorporate. Is it worth it for a business that is based out of your home, and do the benefits outweigh the drawbacks? That is honestly something that you must decide for yourself, but I’ll provide a few facts and tips to get you started on the road to incorporation.
It is true that low-revenue businesses will sometimes pay more in taxes with an incorporation than with a general partnership or a sole proprietorship. However, if your business is generating more than $100,000 each year in net revenue, then tax cuts will be a significant benefit to incorporation, both for you and for any other shareholders or family members. As your home based business grows, you can determine whether or not you will save on taxes with incorporation.
Incorporations receive major benefits in the way of health, life, dental and vision insurance than do sole proprietorships and general partnerships. You can receive a group discount on insurance packages for all employees, or a single package for yourself and for your family. You’ll be able to cut back on self-employment tax, and be better apt to provide a healthy and stable life for your family. Often, home based business owners find it difficult to obtain cost-effective insurance packages. Incorporating your home based business can make this easier and less expensive.
For an incorporated business, there are no limits on the amount of operating or capital losses that the company can transfer between intervening tax years. For an unincorporated entity, however, there are restrictions on capital and operating losses.
Income Shifting & Leasing Assets
Income shifting is the practice of dividing income between the shareholders of a corporation and the corporation itself for the purpose of lowering taxes. A leasing asset is the leasing of a personal property (such as real estate or website property) to a corporation. Both of these practices are series benefits to incorporations because it allows for maximum flexibility within the company.
An incorporation – no matter the shareholders – exists as a separate entity from you and your family. This means that any negative legal actions – such as lawsuits or debt collections – go immediately to the corporation rather than to the owner(s). This provides an extra “cushion” as protection for the owner(s) of an incorporation, versus their liability in a sole proprietorship or a general partnership.
Selling the Company
A sole proprietorship home-based business is difficult to valuate in the best of circumstances. An incorporation, however, is valued based on a number of factors, and can easily be sold if you ever make that decision. With an incorporation, the value of the company will be based on the corporation itself, rather than on you, the owner.
Think very carefully about the current state of your home-based business, and make an educated decision based on facts. If it will be helpful to the business as well as to your financial situation, you might want to consider incorporating.
However, remember that the option never goes away, so you might want to file it in the back of your mind to be drawn upon in a couple of years when you are more ready.