As you start to earn more money and think about growing your business, you may want to consider incorporating.
Should I incorporate?
This is one of the top questions that I get from freelancers and early stage business owners.
Before we get into the types of corporations, there are two big factors to consider in advance: risk and taxes. Today will talk about your attitude toward risk.
What is your comfort zone for putting your personal assets at risk?
Risk is about potential for loss
We think of risk as an opportunity to gain, or an upside. But your appetite for risk is really about your attitude toward potential loss.
As a sole proprietorship or partnership, if you get sued or take on business debt that you can’t pay back, that puts your home, personal bank account, and other savings at risk. If you have a significant number of assets that you are concerned about protecting, this alone may justify the extra paperwork and cost of setting up a corporate structure.
Also, if you think you may want to sell the business, add a partner, or take money from investors in the next 3-5 years, it may make sense to incorporate.
Finally, consider what happens should you die unexpectedly. In many cases, your unincorporated business will dissolve when you pass. If you think of your business as a legacy asset, incorporating will assure that your family can continue to operate or sell the business.
If you read these risks and though, nah, that’s not going to happen, you may feel comfortable continuing as a sole proprietor or partnership. A good general liability insurance policy may be enough to cover your risk.
But if these risks keep you up at night, consider incorporating.
Set it Up
It’s time to separate your personal and corporate assets. You’ll need an EIN, the business equivalent of a Social Security number. Here’s how to do it.
Leveling up with the IRS
Your incorporated company needs to separate its finances from your personal ones. We need to clearly separate your assets from the company’s. This separation is called the “corporate veil.” It’s what protects your personal assets from lawsuits and company debts.
The first step is to get a unique IRS identification number for your company. This is called an employer identification number, abbreviated EIN or FEIN.
Having an EIN and using establishes an IRS record and credit history for your business. From here on out, you will want any revenue you earn and any payments you make to be associated with your EIN instead of your Social Security number.
– Jill James
For more info, head over to the SIF Industries blog!