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There are a lot of misunderstandings when it comes to incorporating your business. This article will help clear up some of them.
Related categories: Business Incorporation Vendors.
Myth #1: You are required to incorporate to do business.
All states allow you to start a business without incorporating it. Some cities and counties require you to register with them or pay a tax/license fee to be in business, but none require you to be an LLC or corporation just to do business.
Many new entrepreneurs rush to form an LLC or corporation before they have even started because they think it is required. It is not, and you can save a lot of money by holding off until you’re ready.
Myth #2: You can’t deduct business expenses without a corporation
This is untrue as well. You can deduct business expenses from your profits as long as they are accurately attributed to the business without incorporating.
Myth #3: Incorporating will protect your assets
Actually, incorporating may protect your assets. An unwary entrepreneur can mess up the protection incorporation provides. Think of forming an LLC as setting up your protection, but you have to make sure to maintain that protection if you want to limit liability.
The most obvious way to mess it up is to commingle assets and pay personal and business bills from the same accounts while not keeping accurate books. If a creditor can make a good case that the money that went to pay your mortgage actually belonged to the business, they have a chance of getting it back. Always keep accurate books!
Myth #4: An incorporation agreement will protect each shareholder’s interest
This is a tricky one that gets people. Sometimes things just don’t work out between you and your partners and it’s time to break up. You think you have an operating agreement but have you even read it?
A lot of mistakes new entrepreneurs make is that they purchase an LLC online from an incorporation vendor but never read the documents, or even more importantly, don’t understand them. Then when things go downhill they have unrealistic and false expectations of what their document does. an incorporation agreement can’t protect your interests if you’re completely wrong about the terms and phrases in your agreement.
One of the reasons we like Nolo so much is that they sell in-depth guides to understand what you are getting into, not just the documents themselves.
Myth #5: You can avoid state taxes
A lot of people see that some states do not have corporate income taxes and think to themselves, “Wow, I can pay myself for free!” That is not how it works. First off, many states do have no corporate incomes taxes. But if you are forming an LLC with pass-through taxation, then the state where you live will still tax all your income, regardless of where your LLC is formed.
Furthermore, income is taxed based on where the money is made. If you incorporate in Wyoming but do all your business in Wisconsin with Wisconsin customers, you will pay taxes to Wisconsin. The only thing you will have done is made yourself is made extra paperwork.
Incorporation is a messy subject for entrepreneurs, and it can get even messier when the issues at hand are hard to understand. Our advice is to educate yourself as much as possible using guides or the books available on the subject before making any sudden moves.
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