Saving Money by Incorporating your Business
I often see and hear ads about incorporating to save money, but I wonder how many people understand what "incorporating" means. I personally incorporated my business many years ago in order to save thousands of dollars in taxes, so I’ll share my experience with you in hopes that it will help you to understand why you would want to incorporate and how to go about doing it.
Back when I was in college, I took a leap of faith and started a small business. During my first year, I made about $30,000. This was more than I had ever made before, so I was ecstatic about this, until I got my tax bill from the IRS the next year! I had heard people complain about taxes, but until then, I had never made enough money to understand what all the fuss was about. So I visited my tax guy to see what he could do, and he gave me one word of advice: INCORPORATE!
At the time, incorporating was a complete mystery to me. I knew that all of the most famous entrepreneurs had incorporated: Bill Gates had his IBM and Warren Buffet had his Berkshire Hathaway. However, I had assumed that incorporating was for the rich, and hadn’t considered how it could be beneficial to me.
I began to study what it meant to "incorporate," and I came to understand that it means to do business through a business entity like a "Corporation" or "LLC" rather than doing business personally as an "Independent Contractor" or "Sole Proprietor." The old saying "don’t mix your business with your personal life" is true on so many levels, and incorporating is the best way to separate your personal life from your business.
Because I had been mixing my business with my personal life, on top of taking away ordinary income taxes, the IRS was making me pay 15% of everything I made to fund entitlement programs like Social Security. These entitlement programs will probably never even benefit me! Even worse, by running my business as an individual rather than as a business, my personal bank account, car, and possessions were on the line if something were to go wrong.
By incorporating, I could have my business income paid into my company’s business bank account, pay myself a "reasonable" wage out of my business account, and then distribute to myself any leftover money as a social security tax-free "dividend." In other words, by incorporating, the government would allow me to save 15% on a big chunk of my income by simply playing the dual role of business owner and employee. When I did the math, I determined that I could have saved almost $3,000 of the $30,000 I had made if I had only been incorporated! I don’t know about you, but $3000 was a lot of money to just throw away!
I was determined to avoid paying extra taxes in the future, so I began to research the various types of business entities I could set up in order to incorporate. I discovered that there are many types of business entities: LLC, PLLC, Series LLC, LLP, LLLP, PC, S-Corporation, and C-Corporation (to name just a few). I also discovered that in order to incorporate as one of these business entities, I would need to draft and maintain a number of documents: Articles of Organization, Operating Agreements, and Meeting Minutes. On top of this, I found out that if I drafted the document wrong, maintained my entity incorrectly, or incorrectly filed something with the state or federal government, I could get fined by the IRS, and even be personally liable for my business risks.
I knew that I didn’t want any of these things to happen, so began looking for some help to guide me through the process of incorporating. At first I did what most of us do when we need to figure something out, and I searched Google under the word "incorporate." My search turned up a lot of cheap incorporation set-up companies. The trouble with the cheap options was that they didn’t customize the business documents to my particular business and circumstances. Even more troubling, some of them were not providing all of the necessary documents. Because of this, every single one of the cheap options recommended that you pay to have an attorney review the documents and draft any of the additional documents that might be missing.
Having gained an understanding of the complexities and risks involved with incorporating, I was convinced that incorporation needs to be done right. So I hired a local attorney to help me incorporate. I have saved so much money by incorporating that I’ve never regretted investing this money to get it done right.
For example, the year after I incorporated, my business earned almost $50,000. Only this time I ran my business through my business entity. Even though I still worked and talked to customers just like I had in the past, this time I deposited all of my paychecks into my business checking account (free to set-up at most banks). I would pay myself out of my business account whenever I needed money, and I kept an excel spreadsheet of money in and out. I also kept a spreadsheet of my major tax deductible business expenses like car mileage, computers, equipment, and travel expenses. By doing these simple things, when I went to file my taxes that year, I discovered that my business entity saved me well over $4000 in taxes. In the years since then, that same business entity has gone on to save me tens of thousands in taxes.
If you haven’t yet incorporated, I recommend that you do so now, before you get busy making money that will complicate your tax filings if you try to incorporate later on. If you think of your finances as a sports contest, you can think of earning money as your offense, and incorporating as your defense. You wouldn’t want to play a game without putting up a good defense, and you definitely don’t want to run your business without incorporating because you have some formidable opponents trying to take away your hard-earned money.
I have set up a lot of entities for small businesses, and I am good at understanding the details of what you are doing. I specialize in providing high quality, customized incorporation services for a very reasonable price. Your one-time fee sets up your LLC business entity to last for 99 years, saving you money and protecting you from your business risks. You will be amazed at how easy and simple it is to run your business through a business entity. Other than having an accountant complete your tax filings, there is very little maintenance to keep your business entity going.
My law firm, Allegis Law, PLLC, provides amazing incorporation services for a very reasonable price. We include customized drafting of articles of organization, operating agreements, meeting minutes, letters of Instruction, and state filings. I will even put you in contact with the accountant who does my personal taxes to help you take care of your IRS and federal EIN and tax elections and filings. Most importantly, my services include advice and consultation with me, a qualified attorney.
Last, but not least, I will help you to choose the name of your business. I have seen my clients choose business names that range from silly to formidable. I suspect that some of them are even using their businesses to impress other people. I guess that this is just one of the fringe benefits of incorporating. In any case, start thinking of a name for your business so that you can have me check Utah’s database systems to ensure that it is available.
Learn more about Corporations as a Business Structure.