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Should You Incorporate Your Side Income Stream?

Incorporation may not be the first thing that comes to mind when trying to develop a side income to make an extra grand per month, but it is an important consideration about which one should think.  Many side incomes have the potential to develop into a substantial sum and may eventually end up replacing a full-time job.  You may end up deciding not to go through the process of incorporating your small business, but at least you will have made an informed decision.

There are several different structures that a business may take such as a C corporation, S corporation, or a limited liability corporation.  Each of these structures has certain characteristics that may or may not be appropriate for your business.  You should consult an attorney if you have specific questions regarding your situation.  However, each of these different structures share several characteristics that can benefit the business owner.

Benefits to Creating a Business Structure

  • Protection of Personal Assets:  This is one of the most often cited reasons to create a business structure.  Having a separate entity with limited liability means that the founder of the business can only lose as much as he/she puts into the business.  Personal property (provided it isn’t used as collateral) cannot be used for the obligations of the business.
  • Ability to Access Credit and Debt Markets:  A business is a totally separate entity from the individual and can obtain credit and take out loans in the name of the business.  The business can solicit outside investors within applicable laws that an individual might be hard pressed to do.  The business can conduct other transactions and own property.
  • Perpetual Existence:  An incorporated business can be bought or sold wholly or in part or can be passed on from generation to generation.  This can be useful for estate planning for the founder.
  • Tax Considerations:  There are often potential tax benefits that a corporation might be able to utilize that would otherwise be unavailable to an individual.  Certain expenses might better be spent by the corporation rather than as income for the business owner.  Having a separate entity can provide the flexibility to determine the best approach to minimizing a tax bill.  Of course, consult your professional tax advisers (attorney, accountant) in these matters.
  • Competitive Advantage:  Having a corporation can provide instant credibility versus another business that is being run as an individual enterprise.  There can be a certain level of respect offered by other businesses to the serious individual who has taken the necessary steps to incorporate.

Personal Experience

Personally, I have a limited liability corporation (LLC) for all of my real estate and internet activities.  It has worked out very well and was relatively easy to form.  I simply called the IRS to get a tax identification number and filed the necessary paperwork with the state.  I do have to fill out a report every two years with the state as well and pay a nominal registration fee.

I won’t go into all the detail about the formation since each state is probably somewhat different, and I am not a lawyer or a business professional.  For me, one of the biggest benefits to having the LLC has been in the form of obtaining extra credit lines.  I have been able to obtain about $20,000 in credit that can be used for the business for such things as carpeting in the rental properties or purchasing supplies or equipment without having to use my personal funds.  I can then pay off those debts with the revenue from the business.

You may or may not find yourself with a side business where incorporating may provide you significant benefits, but it is at least worth a look to see if it makes sense for your situation.

 

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