Now that US tax season over, it’s time to consider incorporating your shop. Doing so will help you save money on next year’s tax return and limit your liability if something goes wrong. Small Business Trends recently published an article that does a great job of explaining how.
Small Business Trend writes:
The S Corporation can help business owners reduce their self-employment or Social Security/Medicare taxes. As an S Corporation, you’re able to split your profits into two payment types: salary and S Corp distributions. You pay Social Security/Medicare tax (i.e. 15.3 percent) only on the salary portion. Meaning, if your business made $100,000 in profit and you pay yourself $50,000 in salary (and then $50,000 in distributions), you’ll only need to pay the Social Security tax on the first $50,000.
Of course, you can’t just go ahead and pay yourself $5,000 in salary and $95,000 in distribution. The IRS looks for “reasonable compensation” for any shareholder who is employed by the business. And they do watch this closely. This means you need to make sure you’re paying yourself market rate for the services you provide to the S Corporation. […]
Without incorporating your business or forming a Limited Liability Company (LLC), your own personal savings and property are at risk to settle any debts of the business. Once your business is an S Corporation, C Corporation or LLC, it becomes a separate legal entity. This means that the corporation or LLC (and not you) is responsible for all of its debts and liabilities.
I know you don’t anticipate angering clients or defaulting on any payments. And most likely, you’ll never encounter this kind of trouble. But things do happen. A legal business structure gives you peace of mind that your retirement savings won’t be wiped out by your business venture. And since creditor judgments can actually last a total of 22 years, forming an LLC or corporation can protect the assets you’ll have in the future, not just what you own today. [more]
If you’re still running your shop as a sole proprietorship, but want to take the business to the next level – now’s the time to act. Contact a local lawyer who specializes in incorporating businesses in your state and find out what you need to do to reap the benefits of a corporation.
J's Upholstery says
Wow sounds good. It is my first year in business, so I started out as cheap as possible. Success is hitting, and it may just might be time to consider an LLC. I love reading the stuff you guys put up. I follow you on Twitter as well.
Thanks for being out there.
J – congrats on your first year in business and the success! If you’ve got the entrepreneurial spirit, working for yourself is so much more rewarding. It’s a great time to do it too – especially in this field. With the economy down, many people are putting off buying a new car and deciding to fix their current ones instead. Thanks for your support and best of luck in all you do. Please let us know if we can be any help!
We have always been a sub S corporation, since opening in 2000. Being an “employee” allows me to better budget by drawing a paycheck every week instead of just dipping into the funds as I want. Keeps things separate between the business side and the personal side. It doesn’t completely isolate you personally should there ever be an issue, but it some safeguard. The threat of a suit is greater than you think, especially when dealing with automobiles and vehicles. Seat belt mounting, seat mounting and placement, seat construction can all play into vehicle safety and the outcome of an accident. And you know everyone responsible for a vehicle is going to be named in a lawsuit.
Sticher_guy – Welcome to The Hog Ring and thanks for the comment! You’re smart to have incorporated early on. Like you, I prefer to keep my personal and business expenses separate. It makes it easier for me to keep track of finances.
Unfortunately, I’ve heard horror stories of folks that didn’t and lost everything in a single suit. What folks need to understand is that sole proprietorships are okay if you’re doing side work or running a tiny operation, but the second you have a little success or start to grow, getting that Inc. is important. It may be a headache at first, but down the line you’ll be glad you got it.
You raise good points about the limited liabilities. Inc’s don’t shield you 100%. But I suppose every little bit helps, right?
Thanks again – come back often! We’d love to hear more of your thoughts!
Clazzio Seat Cover says
why remove the whole seat when you can just a cover over it though? check it out! my covers literally slip over your seat and you have genuine perforated leather! BOOM!
It’s a matter of quality. Slip on covers don’t fit as well as custom seat covers – nor are they as durable or good looking.
xtreme upholstery says
Totally agree with ya on the slip covers, in time they stretch out and get sloppy to the fit! Craftsmanship is what its all about in the upholstery world!
Great points xtreme!
In my state (Ohio), the LLC application is just a couple of pages of fill-in-the-blank. I got the articles of incorporation template from Nolo press. Nolo also has a lot of general information on the whats and whys. Even if you are going to pony up a thou or two for a lawyer, it would pay you to do your research via Nolo first. It’s also been my experience that law offices just use templates for these sorts of routine documents anyway. No lawyer writes a will from scratch more than once.
Debts, yes, but I don’t know how much the LLC umbrella protects you for service-related issues, as it’s your hands doing the work.
Great advise Keith. When doing anything legal, what I usually do is research the issue extensively myself first. I then put together all the necessary paperwork and try to take on a lawyer as more of a consultant than a filer. Law is complicated though, so this approach isn’t always feasible.
I’ll have to research the specifics of how a LLC protects in the case of a service-related issue. My gut instinct is that the business itself is able to be named in a law suit, but not you as an individual. Therefore, the business stands to lose money, but not you or your personal assets (aside from the business of course).
Edward Munday says
Retired…Inc So The Bussiness Will Continue To Be Yours, You Have No Ideal How Easy It Is For Some One To Take It From You.If A Company Goes Bankrupt This Will Keep The Share Holder Or Share Holders Protected As Well Your Tax Situation Will Also Change To The Good. Its Just Not Safe To Operate As A Sole Propritor/OwnerOperator Any Longer. As Far As The Slip Covers Are For , They Would Help Protect New Car Seat Covers I Would Think But An Auto Trimmer Likes Things Done The Hard Way We Usually Get Paid For What We Know And What We Have Done The Harder The Better For Us. If Every One Knows How To Do It And Needs No Special Tools To Accomplish The Job Then Usually It Becomes Worthless To Do The Job.