The first step in launching your business is incorporating. You should have your corporate form in place before opening a bank account, cutting any checks, or signing any contracts. There are two primary reasons to incorporate your business:
- Protect Your Personal Assets from Business Liability: Being out in the world transacting business leads to a much greater potential for liability. Your business can be sued, frivolously or otherwise, by employees, customers, third party vendors, competitors, or even people who simply slip and fall on your premises. If your business is incorporated, you can limit most types of liability to assets owned by the corporation. This means that if you have a large amount of corporate debt, from a lawsuit or from a loan that your company cannot repay, you will likely be able to dissolve the corporation and keep your personal assets, as well as the assets of other businesses you own, safe from collection.
- Save on Self-Employment Tax: In addition to income tax, if you are self-employed, you will have to pay self-employment tax on money earned by your business. If you are not incorporated, you will have to pay self-employment tax on everything you take home from your business. If you are incorporated and you file an S-Corp election with the IRS, you can take a portion of your business income as a salary and the rest as profit. You will only pay self-employment tax on your salary, and will take your profits free and clear of self-employment tax! This means that even though it costs money to incorporate, incorporation will actually save you money in the long run by reducing your self-employment tax.