In a recent interview, Pauline Ho, head accountant at Laus Consulting Services, LLC in Orlando, FL, explained when it’s time to move from self-employed status to form a corporation. —
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When asked for a comment, she said, “One of the most important decisions a small business owner must make is whether or not to incorporate their business – and if they do, then when is the best time to move forward. If your business is growing, then here’s some helpful information about moving from a sole proprietorship to a corporation.”
Ho said that it's crucial to fully grasp the differences between a sole proprietorship and a corporation.
“When people launch their businesses, they typically do so as a sole proprietorship, which means the business and the owner constitute a single entity. Broadly speaking, there are fewer regulations, meaning simpler taxes and less paperwork. A corporation, on the other hand, transforms the business into a distinct entity, separating business and personal assets,” she said.
This division of assets, according to Ho, is one of the main benefits of incorporating.
"The larger a business grows, and the more clients it takes on, the higher the legal liability. If you form a corporation and a lawsuit is filed against your business, then your personal assets would not be up for grabs - whereas they would be in a sole proprietorship,” she commented.
Ho added that personal assets would also be secure in the case of a company bankruptcy after incorporating a business, whereas these assets would be at risk in a sole proprietorship.
She continued by saying, "Another advantage of incorporating is minimizing your tax liability. While taxes are more complicated for a corporation, there are more allowable deductions that you can benefit from. This is particularly true when working with a tax professional who can advise you on the best way to go about doing your taxes."
According to Ho, it’s often better to wait until closer to the end of the year to incorporate.
When asked to elaborate, she said, "In general, establishing a corporation is a great move as it shields your personal assets. However, you might want to hold off until the beginning of January, otherwise you'd have to file two tax returns, one for the sole proprietorship and the other for the corporation."
“If you’re unsure how to go about changing the legal status of your business, then the best thing to do is to get in touch with an experienced accountant before moving forward.”
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