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Should You Incorporate?
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Article 1: Clearing Up The Confusion
The issue of incorporation — or more accurately, what form of legal entity is best for a business — may be the most confusing area of management among small-business owners and the self-employed.
“In my experience, the issue of incorporation is clearly one of the most misunderstood issues among the business owners I talk to,” says Gene Fairbrother, the lead micro-business consultant for the National Association for the Self-Employed (NASE).
“Maybe someone told them they need to incorporate, or maybe they start thinking that since their business has taken off and things are going well, they need to get incorporated and become a real company. But they don’t realize that they already are a real company, whether they’re incorporated or not.”
Keith Hall, a Dallas-based CPA and a consultant with NASE TaxTalk, agrees: “There’s a myth that once you get to a certain level of income or number of employees it’s better to incorporate. But it’s just a myth, because for most self-employed individuals, the income is going to end up on their personal tax returns one way or the other.”
The fact is, from a federal income tax standpoint, the form of entity isn’t going to have a material impact on overall tax liability for many small businesses, “especially for personal services providers like consultants, accountants, carpenters and attorneys,” Hall stresses.
However, in many cases incorporating can help capitalize on legitimate expenses.
“Every business and every situation is different,” says Fairbrother. “And it’s impossible for anyone to suggest the right form of ownership for any company without doing a detailed financial analysis of the business.”
Bottom line? Don’t go it alone when deciding whether or not to incorporate. Talk to your tax professional. Consult with your attorney.
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