1

Starting An Online Business – Incorporation

We’re approaching the start of a new year and many of you are looking into starting an online business. One of the steps is deciding whether or not to incorporate your business.

As a small or home office business, you have four main choices for your business as a legal entity in the United States (for those of you in other countries you will have to check on your own business tax laws):

* Sole Proprietor
* General Partnership
* Limited Liability Company (LLC)
* Subchapter S Corporation

Of the other possible options, a “C” corporation is generally for large businesses and Limited Partnerships can be complicated, so I won’t get into them here.

Also, don’t forget your local business licenses. You may have to register your business in the city, county and/or state where you live. You should also set up a separate bank account for your business.

In general, your main considerations are going to be liability, taxes and how you intend to finance your business.

As I’m neither a lawyer nor accountant I am not going to go into the advantages or disadvantages of each. Plus, every state may have different laws concerning business entities, so I’ll just briefly describe each type of entity.

You really should consult with a lawyer or accountant before making your decision as to which entity is best for your situation. Even if it costs a few bucks up front, it can save you money in the long run.

TIP: When consulting about which business entity is best for you, make sure you ask about the financial benefits of each. Is medical insurance through your business important to you? What about Medical Savings Accounts? What about retirement plans – how much can be put aside tax free?

Sole Proprietorship

A single individual with the proper business license(s). You, the owner are personally liable for the business and all gains and losses are taxed through your personal income tax. In other words, YOU are the business. You cannot sell the business to someone else and adding additional owners or obtaining outside finances can be difficult.

Partnership

A partnership is similar to a Sole Proprietorship with two or more people. Each partner still has personal liability and is taxed through their personal income taxes. The partners agree on who puts what into the partnership and how the profits or losses are to be divided.

Make sure the partnership agreement includes provisions for what to do if one of the partners becomes incapacitated or dies.

Limited Liability Company (LLC)

The popularity of the LLC is because it takes advantage of many of benefits of a corporation while leaving out most of the disadvantages. The owners of an LLC are called members, and the company can be run by some or all members, or even a separate manager. All states except Massachusetts allow only one member for an LLC; Massachusetts requires at least two members.

The biggest advantage is, of course, limited liability. If the company goes bankrupt or is sued, creditors cannot go after the members’ personal assets (in most cases – again, I’m not a lawyer). As before, profits and losses are passed through to the members to be filed with their personal income taxes.

An LLC cannot be taken public through an IPO, but it can be changed to a corporation. There may be tax consequences, though.

Subchapter S Corporation

An S corporation is really a C corporation with a special tax designation from the IRS if it meets the requirements of Subchapter S of the Internal Revenue Code. It maintains the advantages of limiting liability, adds the ease of raising capital, the liquidity of shares and perpetual existence.

Profits and losses are again passed through to the shareholders rather than being subject to the double taxation of a C corporation. The corporation does need to file its own tax return, however. Also, the requirements for record keeping are much higher.

Incorporating A Business Online

The easiest way to incorporate your business is to use an online incorporation service. The one we used is at IncorporateFast.com

They walk you through the process step by step, incorporate in all 50 states and even help you with getting your Federal Tax ID. It’s pretty painless and the price is right.