Is it too early to incorporate?

Many young and first-time entrepreneurs hear a lot of advice on how to incorporate or form an LLC, or limited liability company, as soon as possible. While incorporation offers many benefits, including limited liability protection, not all start-up businesses should rush to form a separate legal entity.

Before deciding to incorporate or form an LLC, it is a good idea to meet with an accountant or corporate services firm to discuss the following areas and determine if the costs of forming an LLC or incorporating will justify the benefits in your case.

• Income Tax Differences Between a Sole Proprietorship, LLC, S Corporation, and C Corporation

• registration fees

• Annual fees and taxes

• Registered Agent Fees

• Minimum state income taxes

• Income Tax Compliance Fees

• Ongoing maintenance costs

Which state should you choose?

If you are considering incorporating or forming a limited liability company, you may be tempted to choose Delaware or Nevada. Both states offer many advantages, including low fees to form an LLC or corporation, but this may not be the best option if you’re a new business with few funds. If this sounds like your situation, it will probably be easier and cheaper to go with the state in which you operate.

Perks like Delaware business law and Court of Chancery and Nevada indemnity benefits are rarely worth the extra registration fees and annual fees for a very small business.

Reasons not to incorporate

While there are excellent reasons to incorporate or form an LLC, there are also good reasons to wait. Corporations have higher burdens, including tax-related and administrative burdens, than an unincorporated business. If your business is at a loss, you will likely have greater tax savings without incorporation.

Incorporating too early will put an unnecessary burden on your start-up business and incur unexpected tax costs. Be sure to discuss your decision with an attorney or corporate services firm to learn more about your specific situation.

Avoid incorporating too early

If your business is still very small and you have few assets, there is a good chance that you will not be sued. If you are sued for fraud or negligence, even incorporation will not protect your personal assets.

If you choose not to incorporate your business yet, be sure to register with your town or city by filing a DBA (Doing Business As) and obtaining property and casualty insurance. Any partner involved in the business must also sign a comprehensive agreement to protect you in the early stages of the business.