Many young and first-time entrepreneurs hear a lot of advice about incorporating or forming an LLC, or limited liability company, as soon as possible. While incorporating does offer many benefits, including limited liability protection, not all bootstrapped businesses need to rush to form a separate legal entity.
Before deciding to incorporate or form an LLC, it’s a good idea to meet with an accountant or corporate services company to discuss the following areas and determine if the costs of forming an LLC or incorporating will justify the benefits in your case.
- Income tax differences between a sole proprietorship, LLC, S Corporation and C Corporation
- Registration fees
- Annual fees and taxes
- Registered Agent fees
- Minimum state income taxes
- Income tax compliance fees
- Ongoing maintenance costs
Which State Should You Choose?
If you are considering incorporating or forming a limited liability company, you may be tempted to go with Delaware or Nevada. Both states offer many advantages, including low fees to form an LLC or corporation, but this will not likely be the best choice if you are a brand-new startup business with little funds. If this sounds like your situation, it will probably be easier and more affordable to go with the state in which you operate.
Advantages like Delaware’s business law and Court of Chancery and the indemnification benefits of Nevada are rarely worth the extra registration fees and annual fees for a very small startup.
Reasons Not To Incorporate
While there are great reasons to incorporate or form an LLC, there are also good reasons to wait. Corporations have greater burdens, including administrative and tax-related burdens, than an unincorporated business. If your business has losses, you will likely have greater tax savings without incorporating.
Incorporating too soon will place an unnecessary burden on your fledgling business and give you unexpected tax costs. Make sure you discuss your decision with an attorney or corporate services company to learn more about your specific situation.
Avoid Incorporating Too Soon
If your business is still very small and you have few assets, there is a very good chance that you will not be sued. If you are sued for fraud or negligence, even incorporating will not protect your personal assets as well.
If you choose not to incorporate your business yet, make sure you still register with your town or city by filing a DBA (Doing Business As) and getting property and casualty insurance. Any partners involved in the business should sign a comprehensive agreement as well to protect you in the early stages of the business.