With each year that I run my business, I learn something new. Lots of new somethings usually. Last year I learned how much I hate to pay taxes! I know it's a necessary evil, but actually having to write a check to the IRS every quarter just plain sucks. So this year, I've been looking for better, smarter ways to run my business without giving my profits to the government. One change I recently made was to become an S Corp. As of February 26th, I'm officially incorporated! Hello Edi Royer, Inc!
I thought I'd share a few things I've learned about becoming incorporated and whether it is right for you. (Tax pros, please correct me if I'm wrong on any of this!)
The first thing I recommend is doing a pros and cons list. Looking at your numbers and seeing if this option is right for you. While there are tax cuts and you can save money, you also have to look at the cost of becoming incorporated. I will be paying roughly $1,000 per year for my monthly statements, quarterly statements and end of year return. As a sole proprietor, I only paid $100 for my personal return/Schedule C at the end of the year. So you need to know that your savings will outweigh your costs.
Your savings come in the form of less taxes. As a sole proprietor, you pay roughly 30% of your profit to taxes. This will depend on your tax bracket, but this is where I fell.
As an S Corp I will still pay 30% on my payroll earnings, but I can make this wage fairly small as long as it's a living wage. I still have to pay taxes on my businesses profits, but only roughly 15%. That change can make a big difference if you're looking at a healthy profit.
I advise sitting down with a tax professional and having them run your numbers to see if this change will save you money.
The biggest challenge for me will be learning a new software program and making sure all my numbers balance. Many people already use Quick Books, but it will be new to me. I'm still learning and just hoping that my numbers balance at the end of the month...fingers crossed! This means stricter book keeping on my part!
Something else to consider if you do choose to become incorporated is your corporation's name. My financial adviser through the name Edi, Inc out there and I just liked how it sounded. When we went to register the name, it was already taken...bummer. So I went with Edi Royer, Inc. You should choose a name that can be used for another business if your current one happens to close. I will still be Doing Business As (DBA) Memories for Life, but my corporation is Edi Royer, Inc. This way if I ever own a flower shop or a Radio Shack, I can keep the same corporation and just DBA a different entity.
If you stuck with me though this whole post, I hope it was informative and helped you with your business :)