The best strategy is to incorporate in 2020 vs. 2021 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 2021. Doing this will make your business official, cut your TAX bill, and lower your risk of an IRS AUDIT. If you are outside the U.S. looking to launch your U.S. e-commerce business, now is the time.
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 (especially during COVID). If you form your new entity at the beginning of January, the entire process could take weeks for you to complete the paperwork, get your EIN, and open a bank account. For U.S. residents, this means that you’ll be stuck filing another Schedule C for the 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 2021. The January start date allows time for your filing and EIN to be processed in December. This puts you in a position to AVOID A SCHEDULE C for your business in 2021. The strategy to incorporate in 2020 is a double win for you because it also eliminates an additional short year tax return for your new entity in 2020 (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.
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 2020, 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 over $137.700 in 2020 and $142,800 in 2021.
3. Operating as a sole proprietorship and self-financing your business damage 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 your company’s structure 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.
If you are outside the U.S. and looking to expand your e-commerce business to multiple U.S. platforms (Amazon, eBay, Walmart…), you will want a U.S. LLC which provides many benefits. The key is the time frame for EIN (45 business days) and the strategy’s execution, tax treaty details, sales tax compliance, and more. The good news is NCP can help you launch your U.S. company 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 2021 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 file articles or get one of those $ 99 tripwires 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 to this page if you are a U.S. resident to learn about our LLC and corporate formations. If you are outside the U.S., keep in mind the extra time frame to apply for an EIN. Learn more here. During the filing process, you will let our team know if you want a start date on the SS4 of 2020 or 2021.