Incorporation doesn’t sound like something a small-business owner needs to worry about—corporations are those big, faceless companies in big shiny skyscrapers, right?
Not necessarily! You only have to be making $50,000 a year to make it worth it from a tax perspective—for the most part. If you have any dealings in construction or in the trades where you work on residences and businesses, you should be incorporated for liability issues, even if you are earning less than $50,000 a year. This way your personal assets are protected, but it doesn’t mean that you’re protected from all malpractice.
Here’s a good example: You meet your buddies for a few beers after work, and you happen to be driving the company truck. You have a few too many beers, but still decide to drive home. On your way home, you collide with another car and put a family of four in the hospital. The corporation will not protect your personal assets in that situation, as you weren’t using the company truck for company work.
Now, if you were driving down the freeway (perfectly sober) on your way to a job site, and a piece of wood falls off the back of the truck, causing an accident where a family of four ends up in the hospital, your corporation will protect you.
True story: We have a roofing company as a client, and one day on a job site, a worker was unrolling tarpaper on the roof. He was kicking it to get the tarpaper to unroll. Unfortunately, he kicked a little too hard, and the roll of tarpaper went right through a skylight. Under that skylight was a bathroom where the owners’ teenage daughter was brushing her teeth. That roll of tarpaper hit the sink and crushed it, missing the girl by literally inches—and if it had hit her, it would have killed her. That’s a real-life example of how a corporation can protect your personal assets, as the incident was caused by an employee, and was a complete accident.
And nobody wants to lose their assets, like their house or their savings, because of an accident.
There are also some possible tax benefits that can go along with incorporation—and you should ask your CPA or tax attorney about how it can help your particular situation. If your CPA doesn’t provide you with the information you need, please call us or call our colleague Robert Lamm, an estate-planning attorney. Between the two, we can answer all of your questions in depth.
But—be warned. There are some costs associated with incorporation. For example:
- Setting up the separate legal entity
- Paying corporation tax every year, which is a minimum of $800
- Paying a CPA to file a separate corporate tax return
- Overall, it can cost you $2,500 per year, at minimum, to be incorporated
And that’s why we recommend that you should be making a minimum of $50,000 to make the associated costs worthwhile, and where we can have the potential to actually save you that $2,500.
If incorporation is not the right option for you, for financial or other reasons, but you still need to be protected on liability issues, we recommend that you call a good insurance agent who can offer you an umbrella Business Owners’ Policy. We recommend BMR Insurance Agency, a local agency in Tustin who has insured many businesses, from roofing contractors through to flooring installers, in the Orange County, Inland Empire and San Diego counties.
When should you incorporate? Ideally, on January 1. This way you don’t need to file two separate tax returns at the end of the year—one for the time you were unincorporated, and another for the part of the year you were incorporated, as you will get a new federal tax ID number for the corporation, for example. Of course, your accountant will be happy to file two tax returns for you, but it will add to those overall costs of incorporation we mentioned earlier.
If you have questions about the legal process of incorporation, we encourage you to call Robert Lamm, who will be able to help you every step of the way. If you have specific questions about how incorporation can help your company, please call us to arrange a free consultation at our offices in Anaheim Hills. Each situation is unique, and although you think that incorporation is right for you, it may not be the right solution for you at this time.
At Simons Accountancy, our emphasis is on making tax preparation and tax season easy on our clients. We’re happy to answer any questions you have, so call us to arrange that free consultation today—April 15th is not that far away! (714) 637-4552.