— George Washington
Last week, we considered the solopreneur’s point of view and weighed the pros and cons of forming a one-person limited liability company. Today we’ll examine why a corporation may be the better structure for those who want to work for themselves.
It’s You All Over
Stocks are at the root of corporations. Just as you’d sell stock to someone else in a typical corporation, in this case, you’d contribute the assets and the corporation would receive those assets in exchange for shares. Then as a shareholder, you’d elect the board of directors — still just you — to chart the company’s course and appoint officers. Those officers — the person you see in the mirror — will manage the company’s daily operations.
If you’ve worked at a large company, you may have wondered what the heck all those VPs and executives did all day. This single-member structure simultaneously puts you in all their shoes, reporting up the chain to the director, who can also be you.
It’s important to note that you must keep the minutes of your board meetings and prove you elected yourself to the director’s position. Furthermore, as you hold more meetings to make decisions about the company’s direction — which could range from investments in software to hiring employees — you need to keep those minutes as well. These corporate formalities are essential to satisfying state law.
Why Go Corporate?
Just as in the examples we used last week, owning and operating your own solo corporation has its merits and might feed your vanity.
You can tell your peers and potential clients: “I’m running my own business, now.” It won’t matter that you’re the only one on payroll. Being able to successfully show you’ve run your own business can help attract others to you for partnerships, mergers, referrals or sales.
You will be paying some taxes on this newfound prestige. But there’s a smart way to handle that.
The Internal Revenue Service taxes all corporations on its profits, regardless of how many members comprise them. This means you’re susceptible to double taxation without the right moves, since owners who pay themselves with the company’s profits must pay taxes on their individual tax returns.
When you elect S-Corporation tax status you can legally and safely avoid this headache. The company won’t be taxed on profits because you’ll pass those, in addition to deductions and credits, on to your personal tax return.
Please note, mileage may vary on the state side. New York state recognizes the S – election, but New York City does not.
Ink Your Inc.
With so many options available to help small businesses, there’s never been a better time to go solo, especially with all the available technological advances. Many of the ideas from forming your own LLC are still valid here, too, but you should discuss all options with an adviser before making any commitments.
Contact Brinen & Associates if you’re a professional still deciding how you want to play the “singles game” in business.