Small Service Business - To Incorporate or Not?

In starting a small service business, one consideration is whether to incorporate a business or form a Limited Liability Corporation (LLC). Incorporating a business is not expensive and can be done online. Limited Liability Corporations can also be completed over the Internet. The USA Government Business web site has documents and information by each state for business incorporation.

Although a little more costly, it is preferable to use a local Attorney for this process, as he/she is familiar with state laws. Some Certified Public Accounting firms provide business incorporation services.

Small service business owners that are not incorporated have a lot of flexibility, especially with income monies. The owner operates in a sub-contractor manner and usually will not keep adequate records, if any. This tends toward a distinct disadvantage.

Commonly called "operating from the wallet", the owner draws or spends money the business cannot afford to pay. Bills fall into arrears and tax problems arise. This lack of accountability eventually leads to the demise of the small service business.

Advantages of Incorporating

When a small service business is incorporated, records are more likely to be maintained by someone other than the owner. Each employee, including the business owner, draws a paycheck, tax records are controlled, and taxes are paid. Forms are filed on time and records of expenses are maintained and obligations met.

Year end tax forms are usually made out by a CPA, which is a "check and balance" for accountability. With this outside help, the owner is free to do his/her job with only a little supervision of records. In this atmosphere the small service business can grow and prosper.

Legal Advantage

A corporation is a sole entity with assets completely separate from the owner. Thus, if legal suits arise, the corporation is liable, not the owner's assets. This is a huge advantage for incorporating a business or forming a LLC in today's "sue-happy" society.

Business Integrity

Incorporation of a business lends itself to integrity with the business community at large. Having a Federal Identification Number (FIN) is almost a status symbol for a business. The cost of business incorporation is minimal. Costs for the state of Oklahoma vary from $150 to $350, for example. Legal counsel of an attorney is not required, although it is preferable. Fees for a CPA firm for tax filings are not exorbitant and most accounting offices will work out a payment plan.

There are few disadvantages to incorporation. Having to be accountable seems to be the biggest hindrance for most people.

Sources for additional information:
USA Government documents and information - http://www.usa.gov/Business/Incorporate.shtml
Benefits of Incorporating - http://www.incorporate.com/benefits_of_incorporating.html
Form a corporation or LLC online -http://www.mycorporation.com/
Personal Experience