When Should I Set Up a Corporation?

This is the time of year that entrepreneurs start worrying about taxes and catching up on their numbers from last year. The question I’m often asked is: “Should I set up a corporation?” Or, “at what point or dollar amount should I set up a corporation?”

This can be a confusing thing to do because you want to do it right and you want to be sure you don’t pay for something you don’t need, right?

So when should you set up a corporation for your business?

The simple answer is my typical answer: “It depends.”

Big Disclaimer – I am not an accountant or an attorney. Consult with them for your specific situation!

Here’s what I can tell you:

If you are starting to bring in money, for liability protection alone, you should consider setting up something like an LLC or S Corp/C Corp. It’s wise to separate your business activities from your personal. You don’t want someone suing you who can get to anything they feel like, right?

What’s an LLC for? This is typically for holding assets (property, equipment, etc.) or certain types of partnerships. It can also provide some tax advantages as you get started.

What’s an S Corporation for? This is usually best for businesses that offer services, like consulting practices, small businesses, family run businesses, etc. This can have better tax advantages after you start paying yourself at least $50,000/yr (consult your accountant for verification). There can be HUGE tax savings with this type of corporation over using an LLC. Unfortunately, most small business owners don’t know what they are and their accountants/CPA’s don’t teach them.

Pet Peeve alert – I can’t stand accountants or CPA’s who are “passive accountants” that only do your numbers, but never offer counsel to improve your situation, especially before the end of the year!

What’s a C Corporation for? This is typically best if you want to take your company on the public stock markets or sell off shares of the company to others.

As mentioned earlier, consult an attorney to know the right corporation for your business, and your accountant to know the tax advantages.

Unfortunately, I’ve noticed most people don’t have a good attorney/accountant team that agree like our team does. Be sure to question why they say it. For example, I’ve know accountants to say you need to make at least $250,000 in your business to worry about setting up anything. That’s usually wrong, and potentially, risky to you. Some may get defensive by the question because they were being too passive with your money.

Don’t hire passive professionals who never advise you unless you ask. Hire those that will look after your best interests BEFORE the question arises.

To sum it up, don’t procrastinate setting up your corporation if you are starting to bring in money. Contact your attorney first to know what corporation to set up, then contact your CPA to know how to use it.

For additional money tips, go to our hompage and subscribe to our weekly money tips now!