Q.: I have always been advised, by CPAs, that until a small company has a specific NET income of approximately $100,000, incorporating is out of the question. The fees associated with Inc. may not be worth the trouble of incorporating. Wrong? If wrong, why? Thank you.
A.: A $100,000 threshold? Hmmm. Plenty of companies are incorporated every day for businesses that are just starting and have no income whatsoever. Depending on your state, incorporation costs only about $300 to $800–and is a one-time expense–so I don’t see why a business earning a net income of, say, $50,000 wouldn’t be able to absorb that. In fact, the owners of small business corporations have been known to put a lot of expenses through the company, precisely so that they don’t show a lot of net income for taxation purposes. The corporation could have a gross income of $250,000, but with salaries, rent, expenses, taxes, etc., it only shows a net income of (for example) $80,000 for income tax purposes. Is that company too small to incorporate? I don’t think so.
There are important legal reasons to incorporate. A disgruntled vendor who sues you doesn’t care whether you’re earning $25,000 or $250,000 If you aren’t operating your business through a corporation (or limited liability company), your personal assets are at risk. Or if a customer comes into your business, trips, falls and smashes her head open, you could be personally responsible for any damages. Your earnings capacity isn’t the issue: your asset protection is.
Finally, if you’re looking to work as an independent contractor, more and more companies want to be sure they’re dealing with corporations or LLCs so that there aren’t any misunderstandings about payroll taxes and entitlement to employee benefits. You could find that there are fewer opportunities open to you–especially for longer-term projects–because bigger businesses don’t want to get caught in the IRS/Department of Labor’s net.