The best strategy is to incorporate in 2019 vs 2020 for many important reasons. If you’re operating your business as a sole proprietorship, this is a logical time of the year to think about forming an entity, going into January of 2019. Doing this will make your business official, cut your TAX bill, and lower your risk of an IRS AUDIT.
That’s a SMART MOVE, except for one part – waiting until January.
Yes, as you may have heard, incorporating in January gives you a clean cutoff for the year, eliminates the complication of a “short year” tax return, and helps you make a smooth transition from a sole proprietorship into a separate legal entity.
Even with all those very real advantages, here’s why waiting until January is NOT the best approach.
January is the busiest time of the year for filings, and therefore the slowest. If you form your new entity at the beginning of January, it could take weeks for you to complete the paperwork, get your EIN number, and open a bank account. What this means to you is that you’ll be stuck filing another Schedule C for income you receive early in the month, which will likely go to you personally or to the DBA (doing business as) name you’ve been using for your sole proprietorship.
Schedule C is the most highly audited IRS form, which puts you back in the IRS audit trap for a whole new tax year.
How can you escape the sole proprietorship, liability and audit trap without having to file a SHORT YEAR TAX RETURN?
The answer is to have us form the entity for you NOW and set the IRS start date for January, 2020. The January start date allows time for your filing and EIN number to be processed in December. This puts you in a position to AVOID A SCHEDULE C for your business in 2020. The strategy to incorporate in 2019 is a double win for you, because it also eliminates an additional short year tax return for your new entity in 2019 (now through December 31st)!
On top of all these practical reasons, it’s important to know that operating as a sole proprietorship is NOT the fast track to success – in fact, it’s the shortest path to join the 95% of businesses that fail in the first 5 years.
To be fair, you probably chose a sole proprietorship for one of three logical reasons: (1) you were looking for the easiest and cheapest way to get started, (2) you wanted to test the waters to see if your idea would make money, or (3) your tax advisor told you to keep it simple and go the sole proprietorship route until you earn more than $40K to $50K in profits.
Unfortunately, even though I don’t believe this is what you’re really thinking, here’s the implied message the rest of the business world ASSUMES you have in mind when they see you operating as a sole proprietorship:
“I don’t believe in myself, my product or my service, or I don’t expect
to make $40K in profits.”
Forgoing on two decades now, I’ve helped over 6,500 entrepreneurs reverse that message, escape the sole proprietorship trap and make a fast start to profits. Here are just a few of the strategic insights that woke my clients up to the money they were leaving on the table:
1. Sole proprietors file a schedule C with the 1040 form in April. Schedule C filers are 300% more likely to be audited (the IRS is leaning on small business owners to close a $300-BILLION tax gap!). If your business lost money in 2019, you’re especially at risk if you plan to write those losses off against other income.
2. Sole proprietors pay the most in taxes. You will pay 15.3% on the first $137,700 of net income plus 2.9% on the net income in excess of $137.700 in 2020.
3. Operating as a sole proprietorship and self-financing your business damages your personal credit score. Sole proprietors frequently turn to self-funding through personal credit cards or cash reserves, because their business credit options are limited. The resulting damage to your personal credit score will severely limit your ability to build business credit when you finally get around to forming a separate legal entity.
4. A sole proprietorship sends a negative marketing message. The biggest potential customers, suppliers, and marketing partners all look at the structure of your company before deciding to work with you. Operating this way broadcasts the message that you don’t expect enough profits to incorporate. Why expose yourself to that kind of opportunity cost, especially at a time when you can least afford it?
5. You have unlimited personal liability. A sole proprietorship does not provide you or your family with even a minimal layer of protection in the all-too-frequent event of a lawsuit or other challenges to the assets that you’re working so hard to build.
ESCAPE THE SOLE PROPRIETORSHIP TRAP WITH CONFIDENCE!
There’s a way out of ALL of these real-world risks (and others that we don’t even have time to talk about here). NCP has hassle-free solutions in place to quickly and affordably get them all handled – so you can start 2020 with complete confidence!
When you form a new entity before 2020, the key is that you MUST form a COMPLETE FORMATION for your business, so you have real protection. If you just file articles or get one of those $99 tripwire offers to get you in the door, there is ZERO protection with that approach. If you are outside the U.S. looking to do business in the U.S., see the details below for your best options.
Go here on our website to learn more about our LLC and corporate formations. During the filing process, you will be able to let our team know if you want a start date on the SS4 of 2019, or 2020.