Incorporating vs. Sole Proprietor

Deciding whether or not to incorporate your business or not is a big decision. As you start out your business, you will most likely be starting out as a sole proprietor. That means that you are the one and only owner and you answer to no share holders.

Sole proprietor (SP) businesses are the easiest to set up and require no paperwork to do so. As a SP business you do not have to register for an EIN (Employee Identification Number) but it is recommended. Having a EIN number will replace having to give out your social security number on any forms that you will have to fill out. As easy as it is to start a SP business, there are some drawbacks on the liabilty end. As a SP, you are not required to have a seperate bank account from your personal account, although it is recommended. If you get sued, your personal assest are not protected. At the very least, a SP business should have liability insurance for this reason.

One way to protect yourself, is to incorporate your business. There are several different types of corporations that you can become.

*LLC - Limited Liability Corporation
*S-Corporation - Sub-contractor Corportation
*C-Coporation - Regualar Corporation
*Partnership

There are some major differences as far tax structure with these corporations. Some are taxed on the individual level and some are taxed on the corporate level. There is just too much information about each one to discuss on this site.

However, as a general rule of thumb from some people I have talked to, if your business makes $50,000 dollars or more a year, you should consider incorporating your business.

For more information about in-depth tax questions, you can visit the Internal Revenue Service website.