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Hey guys, there are a bunch of brilliant folks on here, and I value your opinions. I'm writing a paper for one of my political science classes on incorporation, and the political/social/economic motivations behind it. Should small business owners incorporate or no? What political/economic/social ramifications can you see following that? Especially in today's economy, with the taxes and class warfare inherent to it- why would or wouldn't you incorporate your business? I'm not seeking business owners opinions only...any opinions are welcome, and I will use quotes with aliases with permission. Thanks yall..

I don't know too much about what you're asking, but I believe this is a good starting point to read the differences between types of business structures and how they affect earnings, liability, etc:
http://www.irs.gov/businesses/small/art ... 59,00.html

snatchel wrote:Hey guys, there are a bunch of brilliant folks on here, and I value your opinions. I'm writing a paper for one of my political science classes on incorporation, and the political/social/economic motivations behind it. Should small business owners incorporate or no? What political/economic/social ramifications can you see following that? Especially in today's economy, with the taxes and class warfare inherent to it- why would or wouldn't you incorporate your business? I'm not seeking business owners opinions only...any opinions are welcome, and I will use quotes with aliases with permission. Thanks yall..

At the end of last year, I asked my accountant about incorporation. He said that something like that is probably a good idea, and the reasons are not for what you would think. I was a sole proprietorship until the end of 2010. But, my accountant asked me if I had ever thought about my exit strategy. If I choose to retire, sell my business, pass it off to my son, if I die, or just close up shop, then having some kind of vehicle already in place is one thing that will smooth that exit. He also said that very few small business people give much thought initially to exit strategies because they aren't thinking about trying to get out of business, but rather are focusing on staying in business and growing. When my former employer committed suicide, his wife had a hard time getting all the ducks in a row so that she could make decisions to sell off the company assets and close its doors.

Anyway, in January my company became an LLC, Limited Liability Company, with me as the sole partner. We are thinking of making my wife a 49% owner in order to avoid the situation faced by my employer's widow should something happen to me.

As far as the protections afforded by incorporating, it's pretty much a trade off. You will spend more money in accounting fees and your record keeping and tax filings get more complicated. And in Texas, sole proprietors have most of the legal protections of a corporation anyway. The first attorney I spoke to about it back in 2008 told me that incorporating doesn't really make much sense unless your have annual revenues of about $350K or more, because that is about the point where the costs of forming and maintaining a corporation become very much worth it. Up to that point, being a sole proprietor or an LLC like mine are probably the way to do.

Now all of this said, I'm an ignoramus when it comes to this stuff. I am merely parrotting what an attorney and two CPAs have told me. If someone knows better than that, I'm all ears because I'd like to know.

I might incorporate my business if I wanted to raise capital through equity financing rather than debt, if I planned to oprate in multiple states, or in a single state that didn't have good LLC laws. Alternately, I might form a limited partnership with an artificial person as the general partner. It depends on the needs and nature of the business.

But there's no way I would operate as a sole proprietor for anything full time. That's me. Based on my life experience. Ymmv.

As a small business owner, my concern was liability if something should happen. I also spoke with our attorney and CPA and both have told us if we wanted to do something like that to do an LLC and carry liability insurance as well as workmans comp.

There are no "social" implications from forming a corporation, or at least there shouldn't be.
Incorporating or not is a business decision, not a social decision. Even a well-run business with a primarily social mission should still be incorporated.
If you feel there is some social stigma associated with running/owning a corporation, you should ask yourself whether you're making a good investment to be in business in the first place, IMNSHO.

Also... in my experience... there is zero extra accounting cost and the additional paperwork is minimal vs. a sole proprietorship. Under $1M in revenue you file a "No Tax due" franchise tax report and an annual "Public Information Report". Total time is maybe 15 minutes per year in addition to the same accounting work you should be doing for a sole proprietorship anyway. Reports/filings are done online.

If we're talking about a very-small business... basically a side business... then.. perhaps it's easier to keep a few stacks of receipts and invoices to hand over to your accountant. Your accounting costs will be much higher if you use your accountant as your bookkeeper, but some may find it easier and worth paying for. If you're making your primary income from a business that's run this way, IMO, it's an expensive mistake.

As I've said in other posts..... I would NEVER run a for-profit business (as opposed to a hobby or making a few sales on eBay) without the liability protection of a corporation.... Never, never, never.

My understanding of incorporation/LLC (Limited Liability Corporation/PC (Professional Corporation)'s pros is that
it is a way to separate your personal life's assets from your business' assets. If you are driving your corporation's
vehicle and get in a wreck, you have a better chance of holding onto your residence if you are sued by the other
party with whom you are involved in the wreck.

Some years ago I attended a financial seminar conducted by a stock-picking guru (or so he claimed!). He said that
he himself did not own many assets, but he had various real estate holdings, vehicles, and vessels at his disposal.
His corporation (which was really HIM) allowed him to use all these assets as he saw fit.

Just as another small anecdote to throw out to the crowd: An assessment was made some years ago of the income
of "small business owners". This may have been circa 2005 or so. The study concluded that the average US
small business owner made $86,000 a year. No, I don't have the methodology behind the survey, or who did it, or
I'd be glad to post the information.

SIA

I asked about the social implications simply beacause I may want to explore that as a side topic later.. depending on how deep I want to get into this. I understand that it is a business decision, and I appreciate y'alls imput thus far. Keep it coming...

snatchel wrote:I asked about the social implications simply beacause I may want to explore that as a side topic later.. depending on how deep I want to get into this. I understand that it is a business decision, and I appreciate y'alls imput thus far. Keep it coming...

I'll take a stab at some of the social implications.

For some folks there is a distinction of dealing with a Corporation versus an Individual. We were in business for many years as a sole proprietorship. On occasion we would deal with candidates that were uneasy working with our recruiters because they had a personal stigma about NOT dealing with a corporation. Another issue was dealing with F1000 companies; some large corporations would not use our services because we were not incorporated. Why? Simple, corporate policy--no real reason just an arbitrary decision made at some level more than likely by an individual with a personal stigma.

When you need that remolding done in the bathroom, do you contract to Joe's Handyman or would you rather work with Bathrooms Unlimited, LLC? Good, bad, or otherwise to some people there is a distinction.

i8godzilla wrote:

snatchel wrote:I asked about the social implications simply beacause I may want to explore that as a side topic later.. depending on how deep I want to get into this. I understand that it is a business decision, and I appreciate y'alls imput thus far. Keep it coming...

I'll take a stab at some of the social implications.

For some folks there is a distinction of dealing with a Corporation versus an Individual. We were in business for many years as a sole proprietorship. On occasion we would deal with candidates that were uneasy working with our recruiters because they had a personal stigma about NOT dealing with a corporation. Another issue was dealing with F1000 companies; some large corporations would not use our services because we were not incorporated. Why? Simple, corporate policy--no real reason just an arbitrary decision made at some level more than likely by an individual with a personal stigma.

When you need that remolding done in the bathroom, do you contract to Joe's Handyman or would you rather work with Bathrooms Unlimited, LLC? Good, bad, or otherwise to some people there is a distinction.

There are myriad reasons similar to this... but.. as a business owner it should not matter one iota in your decision to incorporate. Any such issues that might arise during operation of your business can be handled as operational issues. For example, if you feel that your customers (or employees) would generally prefer to do business with a "person" and not a"Corporation", you can set up your corporation as Acme, LLC, DBA "Joe Snatchel".. You would still have the corporate protection while maintaining that sole prop. face to the customer.. Nobody would need to know you've incorporated except you...

I completely understand a business owner that feels strongly that they would be diluting his/her brand by "becoming a corporation"... I get it... But IMO, they need to get over whatever stigma they might associate with incorporating and just do it. The face you show to your employees and customers does not need to change even the tiniest bit just because you incorporated.

As a very general statement, there are two primary reasons to incorporate: 1) to limit personal liability of the owners/shareholders; and 2) perpetual existence. (I'm leaving out tax issues and Subchapter S corporations.) As others have mentioned, it's easier for a corporation to continue in operation when an owner sells, retires, becomes incapacitated, or dies. Obviously, this is largely untrue when the heart of the business is one person or a few key people.

The only social issue is the practice of incorporating to avoid personal liability, then operating a dangerous or dishonest business that harms the public, either financially or physically. However, there are legal methods to "pierce the corporate veil" if a corporation is under-capitalized (including insufficient insurance), so the ultimate negative impact on society is questionable.

Chas.

There's also the "social" aspect of socialists who hate business, capitalism and anything associated with them.

For me, the best reason to incorporate (C-corp, not S-corp) is the requirement to compartmentalize all the finances.
With a c-corp, you need to absolutely keep all the money and property in the corporation, except as you elect to take income. The counterargument is that you are subject to double taxation if you pay a corporate tax and then pay personal income taxes. But it's not that hard to control.
I changed my C-corp to an S-corp some years back, but I was never comfortable with the income pass-through (for tax purposes).

If I start up another it will be as a C-corp, for the same reasons.