To Incorporate, or Not: Factors to Consider

Now that the corporate tax rate has been reduced to 21% permanently, is it a good time to incorporate your business? There is no one-size-fits-all answer to this question but there are some general guidelines to consider.

The primary nontax advantage of incorporating a small business is personal asset protection. Both corporations and LLCs allow owners to separate and protect their personal assets. In a properly structured and managed corporation or LLC, owners should have limited liability for business debts and obligations. Another nontax reason business owners incorporate is perpetual existence. Corporations and LLCs can continue to exist even if ownership or management changes. Sole proprietorships simply end if an owner dies or leaves the business.

If you file a Schedule C, E or F and your only concern is a loss of deductions because of the new tax changes, there is likely little benefit to incorporating your business. None of the deductions for expenses have been eliminated or suspended if you are a business owner, landlord or farmer. In fact, certain noncorporate businesses are considered pass-through entities and may qualify for a 20% qualified business income (QBI) deduction.

Other considerations to incorporating include the type of business you operate, your gross income, the type of assets you use in your business, and whether you have employees and wish to provide benefits. One final point: Regular C corporations are subject to double taxation. This means the income is taxed once at the corporate level and again at the shareholder level when income is distributed in the form of dividends. Pass-through entities pass the income through to the owners, and it is taxed only once on their return.

Be sure to consult with us first before making any decisions on how you should structure your business.