Forming an LLC or incorporating is like filing your taxes. You can fill out the forms by hand, use software, or have a lawyer do it for you. Which option is right for you depends on how complex your situation is.
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This post is provided for general information only. Please confirm the details and circumstances of your unique situation with your tax accountant or other appropriate advisor before taking action.
When do you need to form a corporation or LLC?
There are two sets of reasons why you’d want to form a corporation or LLC — legal benefits and tax benefits.
What are the legal benefits of forming a corporation or LLC?
The main legal benefit of forming an LLC or incorporating is limited liability protection. Generally, if someone sues your corporation or LLC and wins, you can lose everything your corporation or LLC has but you don’t have to give up any of your personal assets.
There are situations where you can still be sued personally even if you have a corporation or LLC. There are also situations where buying insurance can give you enough protection without having a corporation or LLC. Before deciding to use a corporation or LLC for liability reasons, talk to an attorney about what protections you need and the best way to get them.
In some cases, using a corporation or LLC can help protect your assets in estate planning or from creditors. Again, talk to an attorney if this is something you’re interested in.
What are the tax benefits of forming a corporation or LLC?
Different types of businesses have different types of taxes at both the state and federal levels.
Corporations or C-corporations are completely separate entities taxed at a separate tax rate. The corporation files its own tax return and pays income taxes on its profits.
When you take money out as the owner, you claim that money as taxable wages or dividends. Most sole proprietors and small partnerships avoid C-corporations because of this double taxation.
Larger companies often need to use C-corporations because it’s easier to sell stock or they aren’t eligible to use other types of business entitites.
S-corporations are a special type of corporation. Each shareholder gets assigned a share of the profits. You pay your personal income tax rate on that share.
When you take money out, you can choose to classify it as wages or dividends. Taking income as dividends eliminates self-employment or FICA taxes. That’s why most people use S-corporations.
However, you have to take a reasonable salary before you can take dividends. Talk to an accountant about what this means for your industry. Sometimes, you can take a lot of income as dividends and really reduce your taxes. Other times, you need to take all or most of your income as salary and it isn’t worth forming an S-corporation.
LLCs come last because they mean nothing for federal tax purposes. You get to choose how you want to be taxed.
- If you’re a single owner and you do nothing, you get taxed as a sole proprietor the same as if you didn’t form an LLC.
- If you have multiple owners and you do nothing, you get taxed as a partnership the same as if you didn’t form an LLC.
- You can also file a Form 8832 with the IRS and elect to be taxed as a C-corporation (not very common) or S-corporation (very common).
You do not need to form an LLC to be eligible to claim business expenses or to support your business deductions. You can take the same deductions as a sole proprietor as long as you follow good accounting practices to document everything.
How should you form a corporation or LLC?
Anyone can form a corporation or LLC. You can fill out your state’s forms yourself, you can use software, or you can hire a lawyer.
How should you choose how to form a corporation or LLC?
Whether you need help forming a corporation or LLC depends on several factors. Most states have fil-in-the-blank forms that cover the basic legal requirements for forming an LLC.
Your incorporation documents cover things like:
- What activities your business is allowed to engage in
- How you can sell shares in your business
- If there are multiple owners, how they make decisions
The state basic forms cover the legal minimums, don’t go into a lot of detail, and therefore give you a lot of flexibility. If you’re a single owner with a simple business and intend to stay that way, this is generally all that you need.
Once you add a little complexity, like working with partners or forming a non-profit, you might want to upgrade to using software that helps create a corporation or LLC. You’ll often need a little more than the most basic forms, but the legal language is still pretty standard. The software asks you questions to determine what you need to include.
When things get really complex — think planning to bring in investors, many owners, large amounts of money invested, or needing detailed plans on how to operate — it’s time to go to a lawyer. A lawyer will use their experience to help you explore what you need and may create incorporation documents using customized legal language.
Disclaimer: The law is very complex and little things can have big consequences. The biggest risk is that you don’t know what you don’t know. While many people form basic LLCs and corporations on their own with no problems, making a mistake or omission in how you form or operate your business can leave you open to serious personal financial liability. It may be a good idea to talk to a lawyer about your specific situation before you take any action.
What are the software options for forming a corporation or LLC?
There are several online software providers that help you form a corporation or LLC. They help you create the documents they need then file them with the state. You will pay the standard state filing fees plus the cost of the corporation.
Zen Business is a complete online solution to help you plan and start your business. Plans start at just $49 plus state government filing fees.
In addition to forming a corporation or LLC, you can find information on the business permits you need as well as where to find grants for your business.
Incorporate.com only does new corporation and LLC filing. They make it fast and simple. Plans start at $99 plus filing fees.
Legal Zoom is a popular online provider of many types of legal forms. They also offer easy online filing. Plans start at $79 plus filing fees for LLCs and $149 plus filing fees for corporations.
Nolo has many different types of legal forms that you might need to start and run your business. The forms for filing for a corporation start at $99.
Rocket Lawyer is also a provider of all types of online legal forms. Costs vary, and you won’t see the cost until after you’ve entered your information (it only takes a few minutes).
Where can you find a lawyer to help you with a corporation or LLC?
Rocket Lawyer lets you talk to a lawyer who can answer your questions online. You can also find a lawyer who can help you create your corporation or LLC.
Nolo has a directory of business lawyers. Nolo lawyers offer full legal services, and it’s just like using a phone book to find a local lawyer.