Many young and first-time entrepreneurs hear a lot of advice about incorporating or forming an LLC, or limited liability company, as soon as possible. While incorporation offers many benefits, including limited liability protection, not every startup company should rush to form a separate legal entity.
Before deciding to incorporate or form an LLC, it is a good idea to meet with an accountant or corporate services company to discuss the following areas and determine whether the costs of forming an LLC or incorporating will justify the benefits in your case.
- Income tax differences between a sole proprietorship, LLC, S Corporation, and C Corporation
- Registration fees
- Annual fees and taxes
- Registered agent fees
- Minimum state income taxes
- Income tax compliance rates
- Ongoing maintenance costs
Which state should you choose?
If you are considering incorporating or forming a limited liability company, you may be tempted to opt for Delaware or Nevada. Both states offer many advantages, including low fees to form an LLC or a corporation, but this may not be the best option if you are a new business with little funds. If this sounds like your situation, it will probably be easier and more affordable to go with the state you operate in.
Advantages like Delaware business law and Chancery Court and Nevada compensation benefits are rarely worth the additional registration fees and annual fees for a very small startup.
Reasons not to incorporate
While there are excellent reasons to incorporate or form an LLC, there are also good reasons to wait. Corporations have higher burdens, including tax and administrative burdens, than an unincorporated business. If your business is at a loss, you likely have greater unincorporated tax savings.
Onboarding too early will put an unnecessary burden on your startup and lead to unexpected tax costs. Be sure to discuss your decision with an attorney or corporate services company to learn more about your specific situation.
Avoid incorporating too early
If your business is still very small and has few assets, it is very likely that you will not be sued. If you are sued for fraud or negligence, even incorporation won’t protect your personal assets as well.
If you choose not to incorporate your business yet, be sure to register in your town or city by filing a DBA (Doing Business As) and obtaining property and casualty insurance. All partners involved in the business must also sign a comprehensive agreement to protect it in the early stages of the business.