Should I incorporate?

[rachel]

Hi, I'm in New York and I'm wondering if my small business selling household products should be incorporated. My friend who runs a small car service incorporated her business and mentioned that I should do the same. What would the benefits and disadvantages be of forming one? How much does it cost?

 

[Michael Wechsler]

It depends how large the business is and what risks you may have. The basic benefit of incorporating is limitation of liability. This is not to say that, if you are performing an action in your own company and you perform it negligently and injuring another person, the corporate status will insulate you from being sued personally. It won't. It means that in the ordinary course of business, if your business goes bankrupt you cannot be held liable personally for the debts of the company. Additionally, you may also enjoy other limitations of liability, ability to easily sell parts of the company to investors, etc.

On the flip side, you will incur costs and will have to deal with more paperwork. If you have a small corporation, I suggest that you form an "S Corporation" or other similiar type, e.g. LLC, and not a "C Corporation" so that you will not be taxed twice (the corporation and you). In a c corporation the corporation is taxed on its earnings and then earnings passed on to you (dividends) will be taxed as income as well. With an S Corp., you will pay tax only once as though the income flowed directly to you.

There are differences in each type of corporation and too numerous to state here without more facts. TheLaw.com creates and files corporations at low prices which will soon be posted. Feel free to contact me or use the contact form.

 

[TheBear]

Hi,

I am also wondering about incorporating. However, my situation is probably a bit strange.

I am an American living and working in Germany. My "business" will be memberships on my website as well as selling hard goods from the site.

The majority of customers are in the US, the products will be shipped from the US as well.

I prefer not to incorporate in Germany as they have much higher taxes. I have the option of incorporating in another country as well. As my servers as at a co-location facility I have been told that I do not have abusiness presence there as I do not own the facility. The hard goods will probably be handled by a fulfillment service which also means I do not own the warehouse, nor do I have employees. This I *believe* will prevent me form having to collect sales tax in that state as well.

I do want to do this legally. At this time the website has been online for 7 years, but all free to users. I have funded it totally out of my pocket and I haev NOT tried to take any deductions for the costs. Of course as a company, all expenses will be reported as well as income.

Any ideas or suggestions?

Thanks

Dale

 

[Michael Wechsler]

To begin, if you incorporate in a state you will be subject to their jurisdiction. This likely means taxes -- as you have availed yourself of the "benefits" that the state offers. There is much discussion about how the right of taxation is linked to jurisdiction, e.g. you can't be taxed in a state that has no jurisdiction over you. However, by incorporating in a state, it is likely that you must register the secretary of state as an agent to receive service.

The colocation issue is separate but I think what you are talking about is reflected above. Note that state laws vary.