When is the best time to form a business?
A corporation can generally choose its fiscal year. So instead of accounting from January through December, it can account for income and pay taxes on a fiscal year from, for example, July 1 through June 30.
That can be important because when you choose to form your business, it could have an effect on your first-year taxes. For example, if you form a corporation in November and use a calendar year for the tax year, you will pay state taxes and fees for that year, and then owe more for the following year only one month away.
When you form your business could also have to do with the kind of corporation you want to form. An S-corporation is primarily, though not completely, a pass-through entity which does not pay taxes itself. If you are going to spend more than you take in during the early years, using an S-corporation, or no corporation at all, allows you to pass deductions to yourself as the business owners. If it's a regular C-corporation, some or all of those deductions may be wasted, or at least put off until a future date.
What are the advantages of forming a business entity?
In the old days forming a business entity was useful because a corporation could put more money away into a pension plan for its owners than unincorporated businesses. That is no longer the case. But a corporation can still be of benefit because of certain employee benefits that are deductible to the corporation but are not taxed to the employee, such as health insurance. There are also other benefits in this category.
One traditional reason for forming a separate business entity is to limit your personal liability. So in case of disaster, you are likely only to lose your investment in the business, but not everything you own. Insurance is a much better selection if you have to choose. It can protect against your own actions, and prevent you from losing your investment.
Additionally, investors often want a corporation rather than some other business form because it gives them certain rights that limit the risk of their investments.
What are the disadvantages of forming a business entity?
Forming a corporation or other entity is generally more expensive than not having one. There are state fees and additional accounting expenses. Corporations also involve a lot of bureaucracy if you want to be able to benefit from the advantages. Often, business owners choose to form an LLC as these require less formality, while still providing the limited liability benefit.
Which is better: An LLC or S-Corp?
It really depends on the specific situation. An LLC can elect to be taxed as a sole proprietorship, partnership, a C-corporation or an S-corporation, so it's more flexible in that way. It's also less formal without the same level of bureaucracy involved.
An LLC taxed as a sole proprietorship or partnership can be better than an S-corporation in some instances because some deductions, especially for highly-leveraged real estate, can be limited for an S-corporation while not for an LLC.
The best advice for anyone is to talk to their own attorney and tax professional when deciding which entity type is best for them.
How do I choose which state to form my business in?
Some people think it's best to incorporate in a state like Delaware or Nevada. However, if you are not locating your business in those states, there is almost no reason to do that, and good reasons not to.
The reason large corporations form their businesses in Delaware, and a few other states, is that the laws give the corporate management more power and the shareholders less power than under other state corporate laws. If you get to the point that your corporation is so successful that you want it to go public, then moving to Delaware at that point might make sense. But it makes no sense to do it before that.
One of the reasons it makes no sense to set up in Delaware is that you also have to qualify your corporation to transact business in your home state. So you will be paying state fees and filing tax returns in two states instead of one. It's more bureaucracy and more expense, without any real benefit.
Some states, like Nevada, have no corporate income tax. But that does not help you either if your business is not located there. Because your home state will tax your corporation even if it's incorporated in Nevada.
What happens if I move to another state?
There are a few different ways to deal with this. One is to keep the corporation you set up, and just qualify it to do business in the new state. This is the easiest and cheapest way to set it up. But it can be more expensive in the long run because you have to pay taxes to, and comply with the rules of two states instead of one.
Another approach is to set up a new corporation in the new state and have it acquire all the stock of the current corporation. Then the current corporation is dissolved.
What do I need to form a separate business entity?
There really is no one-size-fits-all answer. The first place to start when considering forming a separate business entity is the advice of a lawyer and tax professional. The choice of business entity is quite individual and depends upon many factors. A Rocket Lawyer business services specialist can help talk you through some of the benefits of each type of entity to help meet your business goals.
When setting up a corporation, or any business for that matter, you need to consider where your financing is going to come from, whether all financing will be equity or there will be loans. And if you need investors, where will they come from? The answers to these questions have significant effects in several ways, not just financial or tax. But you could run afoul of securities law, for example, if you are not careful when soliciting investors.
A Business Plan is also extremely helpful. Studies show that people who have written Business Plans when they start a business are much more likely to be successful than those who do not. One reason is that writing a Business Plan forces you to think of all aspects of the business, including funding, marketing, and your competition. If you deal with those in advance, you are more likely to create a roadmap for success.
Why do I need legal documents if I filed with the state?
Corporations require Bylaws and Corporate Minutes, and LLC's may require an LLC Operating Agreement. If you don't have these documents, and your business gets sued, you can lose the limited liability protection that these entities were set up to provide. The formalities of maintaining a separate business entity may seem burdensome at first, but after some time, the requirements become routine.
Also, as your business grows, having the right documentation in place can help avoid confusion and keep your business on the right path.
What is a registered agent and why do I need one?
Every corporation and LLC needs to have some person designated, known as a registered agent, to receive official notices. That person has to be available during normal business at an accessible address to receive notices from the government, or in case your business gets sued. It has to be a real person or a qualified corporation. Fortunately, business owners can hire professional services to ensure they have a dependable registered agent so they do not miss any time-sensitive notices. Rocket Lawyer offers registered agent services at an affordable price to protect businesses and ensure business owners have a registered agent they can rely on.
How do you pay yourself in an LLC?
How you pay yourself in an LLC will depend on how you elect to have the LLC taxed. If it's taxed as a C-corporation, you pay yourself a salary and withhold the necessary taxes. As an S-corporation, you can take a mixture of a salary and other money not subject to the self-employment tax. But again, this is a highly individual decision based on many factors. The best person to talk to about how you should handle this in your case is your tax professional.
How do I trademark my business name?
Whether or not you trademark your business name is an important decision and depends on many factors. If you want to use an internet URL that is the name of your business, having a trademark can be helpful. If you want to do business outside your home state, registering your trademark can provide important protections for your brand. And if you are selling unique goods and want the name to be a sign of particular quality, you will want your trademark to be registered so others cannot use it and ruin your brand’s reputation.
If you have more questions about forming a separate business entity, or are not sure what is the best option for you, reach out to a Rocket Lawyer network attorney for affordable legal advice.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.