When to Incorporate? Credit Protection [Video]
by Financial Design Studio, Inc. / September 14, 2020
When most people think about incorporating their business they tend to think of the tax advantages they may get instead of the liability protections. That’s actually what I want to encourage you to think about today. When to incorporate for credit protection.
Let’s use Mary as an example. Mary started her consulting business 3 years ago. She has been doing great consulting work for a number of different clients. When Mary was just getting off the ground she set up her business simply as a sole proprietorship. Now 3 years down the road Mary has a challenging client. Whatever Mary does she can’t seem to satisfy this client and now something has gone wrong. Mary is concerned about what is going to happen to her business and her personal assets. Because Mary started her business as a sole proprietorship all of the assets of her business and her personal net worth are at risk from any lawsuit Mary’s challenging client may bring. What Mary could have done is incorporate her business as an LLC or an S-Corp.
When to Incorporate?
There are going to be things Mary should be considering before incorporating her business, however. First, there are going to be additional administrative tasks. She is going to need to make sure get taken care of each and every year. This typically involves the admin costs in Illinois it typically costs about $150-$300 a year to continue operating an LLC or S-Corp.
Secondly, if Mary were to file as an S-Corp her tax return preparation would change quite significantly. This means she would have a tax return for herself and for the business as well. It’s important to note that even though there may be more “busy” work after incorporating your business, the protection that’s offered by separating yourself from your business is significant.
Honing in to figure out which makes sense for your business an LLC or an S-Corp really depends on a number of factors. If you would like help trying to figure out which makes the most sense for your business, please reach out and let us know. We would love to help!
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