Most work at home entrepreneurs operate as sole proprietorships, but there are many advantages to incorporating your business. The first and foremost is liability protection. The last thing you need to happen to a successful business is to risk your life’s fortune by going the sole proprietorship route. The U.S. is a sue-happy world and you never know when someone might sue you over a faulty product you sold them, a trademark or copyright infringement, a false claim you made, etc. If you’re not incorporated the offended party could sue you and take everything you own if they won the case.
If you’re incorporated, whether as a general corporation, as sub-chapter S corporation or as a limited liability company or LLC, they can sue your company but they cannot sue you. Oh sure, they may try, but the corporation serves as a veil, that protects you from personal losses.
Profits of a corporation are also taxed at lower rates than personal taxes, with beginning taxes starting at 15%. However, if you need the money earned by your corporation you will need to disperse it to you in the form of either payroll or taxes. In this case you would need to pay payroll taxes, and on dividends you would also have to pay personal taxes. Hence, if this were the case the disadvantage of a corporation could be what is called “double taxation” — that is, paying corporate taxes on the profits and personal taxes on the dividends. But, if your work at home business represents a parttime enterprise that you’re doing in addition to a day job and you don’t need to pay yourself dividends or a salary, then you could incur less taxes by keeping the earnings in your corporation and paying corporate taxes.
The advantages of an LLC or a subchapter S corporation over a general corporation is you erase the problem of the double taxation, yet keep the liability protection function of a corporation. That is, the profits you make in an LLC or subchapter S corporation are passed directly through to you the owner and you pay personal taxes but no corporate taxes. I might also add, however, that if you do incorporate you’ll have to pay a new tax, called a franchise tax, on your corporation each year. Franchise taxes are usually based on a sliding scale that has to do with your total earnings.
For more information about incorporating a business any one of the 50 United States, visit one of the following incorporation facilitators below:
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