When to Incorporate Your Online Business
An online business may start small and suddenly turn into something bustling and very business-like. When is the moment that incorporating a business is going to be beneficial for an online business? Here are some of the basics about incorporating a business and why it may be a good idea for your online business.
The Process of Incorporating a Business
Incorporation takes your business from being something associated with you to being its own separate entity. Incorporated online businesses allow the owner to limit their liability personally, separating both income and debts of the business from personal income and debts. First you should decide what kind of incorporation you should be. Most online businesses become limited liability corporations of some kind or another – either an S-Corp or an LLC (limited liability corp). You’ll be required to pay a fee, fill out the incorporation paperwork, and your taxes will be more complex, but the benefits can really be worth your while.
Why Incorporate an Online Business?
The benefits tend to speak for themselves. They also inform a timeline for when it makes sense to form a limited liability company or S-Corp. The majority of benefits are financial. Your finances will be separate, as well as your credit rating. If your business fails or is in debt, you won’t be forced to use personal assets to pay back debts. You can also pay fewer taxes once you incorporate, as long as you’ve waited until you’re big enough.
The downsides to incorporation are straightforward. You will have to fill out a lot more paperwork, there are fees involved, and depending on the way you’ve conducted your business the liability protection is limited. That’s why it’s called a limited liability corporation. You can’t run a business into the ground, pay yourself a salary, and expect to be protected.
When Incorporating a Business Pays
You’re not going to want to incorporate your online business right away. The additional paperwork and fees aren’t worth your while until you make enough money to benefit on the tax front. Tax liability will depend on your state as well as current federal tax laws. But once you get into income over $100,000, you can safely say that you’re probably going to pay higher taxes as an unincorporated business. You can save as much as $30,000 by being incorporated.
Talk to an accountant about the cut-offs for your state and type of business. Once you hit the income level, you’ll be ready to become a limited liability company.