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Should I incorporate a Home Based Business?

I’m just a small business; do I really need to incorporate?

It doesn’t matter whether you’re a fortune 500 company with thousands of employees or an individual operator of a home based business, Incorporation is the best way to protect yourself and your personal assets from the threat of lawsuits. Incorporation also carries the additional legal advantages of:
1. Reduced Taxes
2. Increased Privacy
3. Reduced Risk of Audit
4. Building Credit
5. Raising Capital
6. Enjoying Corporate Benefits

A corporation is a legal entity empowered by state statute which can be used for the benefit of its shareholders to act as a scapegoat, decoy, servant or friend depending on their needs. An entity you can control without being held liable for its actions.

If you operate a business of any size or are considering starting a business, establishing a corporation can provide a cost effective foundation to reduce your taxable income, protect your personal assets and facilitate estate planning in your best interest.

1. Tax Savings – Properly structured corporations can pay a fraction of what someone would pay in federal taxes on the same personal income and in some cases pay no State taxes. The variety of tax saving strategies that can be obtained through the corporate structure is vast including medical coverage strategies, retirement savings, after tax investments, insurance, travel, entertainment, real estate, recreational vehicles and more.

2. Asset Protection – Every day thousands of lawsuits are filed by individuals, lawyers and businesses looking for easy money. Using a corporation to shelter your personal assets from the potential liability of your business can provide safety and peace of mind.

3. Estate Planning – America’s wealthiest families have always known the advantages of careful estate planning. Properly structured within a corporation, estate benefits can be paid out without paying estate taxes. This can mean the difference between significant wealth to family survivors or significant wealth to the government forcing loved ones to sell the estate just to pay the taxes.

What State offers the best incorporation benefits?
The answer to this questions is best answered by a competent Attorney and Accountant based on your individual circumstances. However the following information should provide you with a good prospective from which to begin your discussions.

States with the most business friendly tax systems:
According to the new 2007 edition of the Tax Foundation's State Business Tax Climate Index,, “Wyoming has the most business-friendly tax system of any state while Rhode Island is the least hospitable to businesses. After Wyoming, the states with the most business-friendly tax systems for 2007 are: South Dakota, Alaska, Nevada, Florida, Texas, New Hampshire, Montana, Delaware and Oregon.” http://www.taxfoundation.org/files/taxwatch-fall2006.pdf

What is the best Corporate Structure?
There are basically 4 types of corporation “C”, LLC, Close and S. Again, be sure to consult a competent business Attorney to decide what’s best for your business.

'C' Corporation - The c corporation is a legal separate "entity" which may live forever or be empowered to protect the shareholder from economic harm. It my own assets, sue or be sued, transfer its ownership easily, borrow money, mortgage its assets, and file bankruptcy. A board of directors and corporate officers remove day to day management from the hands of the owners (shareholders). Shareholders elect the board at shareholder meetings.

LLC - Otherwise known as Limited Liability Company (LLC) hase members instead of shareholders. It may elect to pass gains or losses, credits or deductions, on to the members of the LLC. An LLC status avoids the potential corporate problem of "double taxation." Individual members may benefit from a reduction in their taxable income if the corporation operates at a loss. Despite their unique tax treatment, LLC’s maintain full corporate attributes like limited liability. If you are not sure about what type of corporation to start with, this would be the one to choose. An LLC can later be converted to a C corporation, much easier than converting a C to an LLC.

Close Corporation - The Close Corporation was created by an act of legislature especially for small corporations which have a small number of stock holders usually having ties to one another through family relationships or friends and business partners. Close corporations are special cases of regular business corporations electing to operate in a more informal manner likened to partnerships. Regular business corporations must conduct shareholder and director meetings, elect a board of directors, and provide shareholders with written proposals for any major corporate action to be voted on in the annual meetings. Family corporations usually do not hold annual meetings because the family regularly makes decisions around the breakfast table or wherever. A Board of Directors is also not required and so there is much less paperwork required for ongoing operations.

"S" Corporation - "S" status for a corporation is granted by the IRS to any regular business corporation or close corporation which meets specific criteria. Domestic corporations having 100 or fewer shareholders all of the same class who are citizens of the U.S. or resident aliens may elect to pass gains or losses, credits or deductions, on to shareholders in much the same manner as partnerships. "S" status avoids the corporate potential problem of "double taxation." Individual shareholders may benefit from a reduction in their taxable income if the corporation operates at a loss. Despite their unique tax treatment, "S" corporations maintain full corporate attributes like limited liability and continuity of life. Whether a corporation is a regular "C" corporation or a close corporation, it may become an "S" corporation for tax purposes.

Whatever structure you choose and regardless of where you incorporate, your business and your family will benefit from a carefully planned and executed corporate strategy.