Choosing the Right Business Entity - Sole Proprietorship May Still Be the Right Choice
So you're ready to start up your new business in San Diego but are still wrestling with the idea of incorporating or forming an LLC (Limited Liability Company) instead of operating as a sole proprietor? Young entrepreneurs should be cautious. There is a misconception that a Corporation or LLC is always the right choice for new business. Law firms and attorneys and even do-it-yourself legal services sing the praises of incorporation and routinely dismiss the sole proprietorship. After all, small businesses do not need lawyers to obtain a business license. In reality, operating as a sole proprietorship may still be the right decision for many start-ups. When starting a new business, all forms of business should be considered including the sole proprietorship.
There are two key factors that influence the business formation decision - minimizing taxes and limiting personal liability. In most cases, particularly in the small business context, tax savings from incorporation are negligible or non-existent. While corporate tax rates might be lower than personal tax rates, small business owners still have to pay income tax on dividends and the salary earned as an employee of the corporation. If taxes were the only benefit to incorporation, the hassle, expense and time necessary for incorporation would hardly seem worth it. Individuals starting up a new business often find themselves bogged down with corporate formalities instead of focusing on the business at hand.
There are two key factors that influence the business formation decision - minimizing taxes and limiting personal liability. In most cases, particularly in the small business context, tax savings from incorporation are negligible or non-existent. While corporate tax rates might be lower than personal tax rates, small business owners still have to pay income tax on dividends and the salary earned as an employee of the corporation. If taxes were the only benefit to incorporation, the hassle, expense and time necessary for incorporation would hardly seem worth it. Individuals starting up a new business often find themselves bogged down with corporate formalities instead of focusing on the business at hand.
