One of the most frequently asked questions by business owners who are sole proprietorships is, “when should I look to converting my business from a sole proprietorship to a corporation or LLC?” Many business owners have been successful with their sole proprietorship, but are unsure on whether they should continue on with the same entity or change themselves over to a corporation. Timing is everything and can be the difference between your business growing and becoming a success or your business being hurt. There are some signs to pay attention to that can help you to decide if it is the right time to start looking into incorporating or holding off on until your company gets a little bigger.

One of the first signs to look for in wanting to incorporate your business, is that your business should be making at least $100,000 in gross earnings with the anticipation that the earnings will continue to grow. The reason that a company should have a least that much in gross earnings is so that you will be easily able to afford the costs that come with incorporating as you will have to pay for the state filing fee, corporate tax, any certificates, etc. This ensures that you have enough capital to fund the incorporation without your business going bankrupt while getting your business incorporated as you will need to pay annual or sometimes bi-annual fees after the initial incorporation fees.

Another sign to show whether or not your business is ready to be incorporated is that you feel you are paying more in taxes than you should be. When you are under a Sole Proprietorship, you and your business are considered the same entity, so you are taxed on the income that you make and pay self-employment taxes of 15% to Social Security and Medicare. If your business profits become large, then you will be paying a large sum in self-employment taxes. If your business was to incorporate, you would be able to cut yourself a check and you would only pay the taxes on your income, while your business profits will not be taxed on the self-employment taxes.

If your business is in an industry that is susceptible to claims of negligence or other liabilities and you own a lot of assets, that may be another sign that your business should incorporate. In being a Sole Proprietorship, your business lacks the protection that an LLC or another corporate entity would have. Essentially, this means that if your business is ever sued, doesn’t pay the bills or taxes, or falls behind on any other financial obligation and you are a non-corporate entity, than you as the owner become personally responsible. Incorporating can spare you from having to use your personal assets and only your business assets can be used to pay off the debt, in majority of the cases.

Some other signs that your business may be ready to incorporate is if your business is looking for third party investors, as you will need to have an entity set up in order to accept any capital investments. Another sign that you may need to incorporate is that you need or are looking to build up credit for your business since, in a non-corporate entity the business owner uses their own personal credit to sign for loans and credit cards. If there is more than one founder or owner in your business then having your business incorporated can mean protection in the event of any misunderstandings with your partner(s), regardless of your relationship. If your business is interested in issuing stock to offer an extra incentive for employees, vendors, or contractors than it would be easier for your business to issue the stock for purchase as an incorporated entity.

Before making the steps to begin incorporating your business, it is best to meet with an experienced accountant who can look over your business and advise you on whether your business is ready to incorporate or not. There may be some signs that your business is ready to incorporate, but the accountant sees that financially your business would not be able to afford incorporating. The accountant may be able to find new tax deductions or other ways to obtain funding if they believe the business is not ready to incorporate, if you were looking at those reasons to want to incorporate. Our firm offers a FREE 1-hour business consultation to small business owners in Rhode Island and Massachusetts who would like to discuss incorporating or are in need of accounting, bookkeeping, payroll, and/or tax help.

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