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If you’ve gone through the joys and pains of starting a business—and you’re actually making money at it—you want to keep as much of that money as you can.
That’s why every new business owner needs to confront the decision of how and when to incorporate a business and classify its tax status.
There have been record numbers of new business filings in the United States since the arrival of COVID-19. The entrepreneur behind each of these applications made an important decision that you also need to make: Should your business be taxed as a Limited Liability Corporation (LLC), an S corporation, or something else?
The business formation and tax lingo – Sole proprietorship, Partnership, Limited Liability Corporation, S corporation, C corporation, and so on – can quickly get overwhelming. But it’s a choice you need to make—and in many cases, you can get the benefits of both.
Here’s what to know.
LLC or S Corp: Why Decide Now?
There are three main reasons to consider incorporation sooner rather than later.
You’ll Save Money — a Lot of Money. The Internal Revenue Service makes business ownership an attractive option. When you’re incorporated, there are ample opportunities to write off expenses and investments you make in the business, which reduces your overall taxable income. You won’t get these same benefits when you’re self-funding with no paper trail.
You’ll Get Protections. If you incorporate as a business entity, and your business is sued or finds itself in debt later on down the line, your business will be liable. Your personal assets, however, will be not liable; if your business goes under, you’ll keep the house, car, and savings account.
We don’t start a business expecting to go bankrupt, but the reality is that it happens: 50% of businesses fail within the first five years. The pandemic also showed us that tides can turn unexpectedly in commerce; it’s possible that forces outside your control could lead to reduction or termination of your business.
You Might Be More Motivated. When you incorporate your business, you’re going to take it more seriously, and your prospective clients will too. Business owners who expect to be around for the long game take the time to incorporate because it projects professionalism and quality …….