Congratulations on getting your small business up and running! Now is a great time to consider whether incorporating or forming an LLC makes sense for you.

Plus, you've got a few choices about how to incorporate. You can do it yourself (time), hire a lawyer (money)—or when you're ready, Nazaire & Co. is here to help.

We simplify the filing process, saving you time and money, to help you get the benefits of incorporation that thousands of clients are enjoying today!

The Benefits of Forming a Business

You don't have to be a large operation with several employees to benefit from incorporating or forming an LLC. In fact, quite the opposite is true.

Many of Nazaire & Co. customers are home-based, one-person businesses with less than $50,000 in revenues. And many are just getting started—and have no revenue yet!

Get an overview and important details of the following benefits in this section:

• Liability Protection
• Tax Savings
• Reducing the Chance of an Audit
• Establishing a Professional Identity
• Raising Capital

Liability Protection

In our increasingly litigious society, it is becoming ever more important to limit your exposure and protect yourself from liability.

The primary reason many businesses form corporations or LLCs is to protect their personal assets. As a sole proprietor, your liability for business debt is unlimited, meaning personal assets such as your home, personal bank accounts and other valued assets may be at risk.

Forming a corporation or LLC for your business can protect your personal assets.

Tax Savings

If you are operating as a sole proprietor, you will be required to pay self-employment tax on your profit, currently at 15.3% in tax year 2006.

Sole proprietors may be able to save on self-employment taxes by incorporating and paying themselves a fair market salary as employees of the S-corporation.

Self-Employment Tax Savings Calculator: Our calculator can help you figure out potential tax savings as an S-corporation.

C-corporations are afforded a series of tax benefits and advantages by the IRS that are not available to sole proprietorships and other forms of small business. For example, the C-corporation may offer tax advantages if the business sustains losses for a period of time.

C-corporations also have the ability to divide income between the corporation and its shareholders in a manner that lowers overall taxes. Profitable small businesses with shareholders in higher tax brackets stand to benefit the most from the practice of "income shifting."

Reducing Chance of Tax Audit

Sole proprietors tend to be more likely to file incorrect returns (many are self-prepared), and tend to underreport revenue or overreport deductions.

For these reasons, the IRS has audited a much higher percentage of sole proprietor tax filings than corporate filings in recent years.

In tax year 2004, a Schedule C filer stood a 1 in 33 chance of being audited. For nonbusiness filers, the odds were around 1 in 130.

This means that sole proprietors are significantly more likely to be audited!

Establishing a Professional Entity

Separating yourself from the competition by establishing a professional identity helps increase trust and credibility with your customers.

Most businesses choose to incorporate to prove their legitimacy to both customers and suppliers. Putting "Inc." or "LLC" after your business name gives you the credibility and professionalism that your clients are looking for.

Raising Capital

If you are looking to raise capital, incorporating or forming an LLC also increases the legitimacy of your company from an investor's standpoint.

Investors are interested in making sure they are investing in a sound business—one that has adhered to standard business formalities.

Entity Types

When you start a small business, you must decide whether it will be a sole proprietorship, partnership, corporation, or limited liability company (LLC).

Questions to ask: What type of business do you run? How many owners do you have? What is your financial situation?

There is no one choice that suits every single business: Business owners have to pick the structure that best fits their needs.

Comparison Chart: Compare business entities.

Sometimes the best ownership structure for your business depends on the type of services or products it will provide.

Other times business formation considerations are based on such questions as: Do you plan on going public or issuing shares? Do you plan to have international investors, or any investors at all?

If your business will engage in risky activities you'll almost surely want to form a business entity that provides personal liability protection (limited liability), which shields your personal assets from business debts and claims. A corporation or a limited liability company (LLC) may be the best choice for you.

Corporations

What sets a corporation apart from all other types of businesses is that a corporation is an independent legal and tax entity, separate from the people who own, control and manage it.

Because of this separate status, the owners of a corporation don't use their personal tax returns to pay tax on corporate profits—the corporation itself pays these taxes.

Owners pay personal income tax only on money they draw from the corporation in the form of salaries, bonuses and the like.

One of the main advantages of incorporating is that the owners' personal assets are protected from creditors of the corporation. For instance, if a court judgment is entered against your corporation saying that it owes a creditor $100,000, you can't be forced to use personal assets, such as your house, to pay the debt.

Because only corporate assets need be used to pay business debts, you stand to lose only the money that you've invested in the corporation.

S-Corporations

An S-corporation begins its existence as a general, for-profit corporation upon filing the Articles of Incorporation at the state level.

Once the S-corporation filing is complete, the corporation is taxed like a partnership or sole proprietorship rather than as a separate entity. Thus, the income is "passed-through" to the shareholders for purposes of computing tax liability.

Therefore, a shareholder's individual tax returns will report the income or loss generated by an S-corporation.

If you are paying high self-employment taxes, an S-Corporation may be worth considering.

As a sole proprietor, you will be required to pay self-employment tax on your profit, currently at 15.3% in tax year 2006. The self-employment tax consists of two parts: 12.4% for social security and 2.9% for Medicare. While only the first $94,200 of your combined wages, tips, and net earnings in 2006 is subject to the social security tax, all earnings are subject to the 2.9% tax for Medicare.

Sole proprietors may be able to save on self-employment taxes by incorporating and paying themselves a fair market salary as employees of the S-corporation.

Self-Employment Tax Savings Calculator: Our calculator can help you figure out potential tax savings as an S-corporation.

Limited Liability Company (LLC)

Limited liability companies (LLC) combine aspects of partnerships and corporations.

An LLC combines the corporation's protection from personal liability for business debts and the pass-through tax structure of a partnership or sole proprietorship.

And, while setting up an LLC may be more difficult than creating a partnership or sole proprietorship, running one is significantly easier than running a corporation.

If you're concerned about being held personally liable for debts of your business, then an LLC may be just the thing for you.

The advantage of a LLC over a corporation is that most states require fewer formalities be observed in comparison to a corporation. The LLC structure requires less paperwork and documentation than with a corporation. For example, with an LLC there is no need for annual meetings or updating the minutes.

Similar to an S-corporation, your LLC is what the IRS calls a "pass-through entity," like a partnership or sole proprietorship. An LLC with more than one member is automatically classified as a partnership for tax purposes.

This means that business income passes through the business to the LLC members, who report their share of profits—or losses—on their individual income tax returns. It is not considered a separate tax entity from its owners for tax purposes, whereas a C-corporation is considered separate for tax purposes.

Each LLC member must make quarterly estimated tax payments to the IRS. While an LLC itself doesn't pay taxes, co-owned LLCs must file Form 1065 with the IRS each year. This form, the same one that a partnership files, sets out each LLC member's share of the LLC profits (or losses).

LLCs can also offer an additional tax advantage over a corporation because the allocation of earnings among owners is flexible. The owners of an LLC can agree to allocate the company's profits and losses among themselves however they see fit, and not necessarily based on what percentage of the company each owner controls.

However, LLC owners can elect to have their LLC taxed like an S-corporation. This may reduce taxes for LLC owners who need to retain a significant amount of profits in the company.