The $11,127.23 Wake up Call: Starter Facts about Incorporating Your Biz - Christine Kane

I’m in a lawyer’s office. All around me there is shiny mahogany furniture. I’m sitting stiffly in a red leather wing-backed chair that’s got manly gold studs all over its seams. The walls are covered with framed pithy inspirational success photos. You know the ones, right?

Image for within article (If this is hanging in your office, go get a cool painting or something. Just sayin’.)

My lawyer drones on… and on. My thoughts go something like this:

“If this is what comes with making more money, I may have to rethink my entire life’s path.”

But I take a deep breath and force myself to listen. My accountant has already lectured me: The upward trend in my business makes incorporating a wise thing to do.

Many years later, I now see my clients go through this same experience. They start a business with a simple idea, they begin to make money – and, in their glee of breaking through glass ceilings, they forget about things like taxes and legal.

Take Sarah for instance.

Sarah started her own design business. It was all just “leap and the net will appear.” She made only about $17K the first year of her business, so she never really had to consider taxes, or even what a “sole proprietor” was.

But during her first year in Uplevel Academy, her revenue jumped to $61K. She was ecstatic.

Until she got her tax bill for the year: $11,127.23.

This was an unexpected hit to Sarah, who was still riding high on more than doubling her revenue in a single year. (And yes, she was on track to go even higher in the coming year.)

But this is the moment when a decision must be made…

Do I take this growth as an indication and inspiration to keep growing? Or do I shrink and avoid putting on my big girl panties?

Many people get scared when they finally understand that they can grow their business big time. Stepping in to your success means doing some uncomfortable (and yes, tedious) things.

So I’m speaking to the Sarahs of the world. Remember: I’m not a lawyer, so I can’t give you legal advice. But I can give you some pearls I’ve gleaned from my own trial and error. I’ve built not one, but two business. And I pay more in taxes now than I used to make in an entire year.

What I know for sure is this: Big time expansion happens when you approach your business with both Strategy and Soul. (Big girl panties not included.)

3 Facts About Your Sole Proprietorship

When you start a business and it’s just you – you’re a sole proprietor. It’s the easiest path to get you going.

Get a DBA. (“Doing Business As”)

Get a bank account.

And hit the streets.

As the business grows, consider three things:

1 – High Self-Employment Tax

As a sole proprietor, you pay a self-employment tax, which can be a huge chunk, especially as you start to uplevel your revenue.

2 – No Business Entity

Your business name is simply a trade name. It’s not a separate entity from you. All money and debt? It’s yours. Personally.

3 – No Legal Protection

The result of the set up in #2 is that you don’t have legal protection if anything goes wrong. (And if you’re thinking what could possibly go wrong?, ask me over a glass of wine some night to share the story (from my days as a performer) of the New Year’s Eve event I did in a church — and the advent wreath I decided to light up to lend some “ambience” to the evening.)

Yes, having a sole proprietorship is a simple and do-able starter place for any solo business owner. But at some point (as with Sarah when she began working with me in Uplevel Academy) you’ll grow. And growth will bring more complex issues to consider.

This brings me to the TWO BIG REASONS to abandon your sole proprietorship structure…

1 – Tax Reasons

When you form a corporation, you create an independent tax-paying entity. What this really means is that your corporation — not you, the owner — pays the income taxes on your business profits.

Also: the corporate tax rate is typically lower than the personal tax rate.

2 – Legal Reasons

When you form a corporation, it’s an independent legal entity owned by its shareholders (which may just be YOU at this point).

The point, you ask? This way, you’re not legally liable for the debts or actions of your business. The business corporation itself is.

SO! What this means is, when some lawyer calls you up and wants to sue you for everything you’re worth because the dry pine needles on an advent wreath caught on fire during your performance and singed a mark in the carpet of the church…?

…then your ass… (and your assets) are protected. ( Even though you’re thinking, “I’d never be that stupid” – you never know. In a super litigious world, this protection is worth thinking about. Trust me. I even offered to pay out of pocket for the damage – but they chose to come after me for everything they could get.

The Downside of Incorporating

1 – It costs a good chunk of cash up front

Setting up a corporate entity can be expensive. Especially if you’re just riding the winds of higher income.

There are online legal services which can defray costs. However, I recommend having a lawyer do the work for you. This is where it’s worth it NOT to DIY something. One small over-looked DIY glitch can affect you many years down the road… when you least expect it.

2 – Tedious paperwork

With a more complicated business structure, you’ll have higher administrative fees and more complex corporate tax returns. It will take time to understand and align with a new framework for turning in required documents and financial info.

What about an LLC?

Besides incorporating, another option is an LLC — Limited Liability Corporation. Both routes have their pros and cons, depending on your ultimate goals; every business is different. Do your homework here. Have a conversation with your accountant or lawyer.

Bottom line is this:

Yes, it’s easier to continue down the well-worn path, pay a few more taxes every year, and not be burdened by all of these unpleasantries.

But if you’re like me, and I suspect you might be, your business is your passion, your unique expression — your purpose.

Give it the structure it needs to outgrow the “leap and the net will appear” idea that got it started. That way? It has a chance to become a true movement that changes the world.

  • Tammy

    Oh no…my quarterly reporting got packed. 🙁

  • Andrea Mock

    As a sole proprietor you can get general liability insurance. Mine costs about $200 a year. That’s an in-between solution if you don’t want to grow big, which I don’t.

  • Patrice A Federspiel

    Great Timing Christine! This has been on my mind a lot lately, apparently the time to take action is NOW! Thanks for the nudge.
    Aloha, Patrice

    • Christine Kane

      Go Patrice! (and i’d say that YES, as successful as you are…it’s definitely time. 🙂 )

  • Sandy Rees

    I JUST went through the process to switch from a sole proprietor to a corporation. It was a nightmare of paperwork, opening new bank accounts, new credit cards, etc., but it was worth it. I FEEL different about my business now – it’s a real business. And I’m the CEO and President. Breathing that one in every day. 🙂

  • Alexandre L’Eveille

    Great advice. I did get a DBA early on (2004) when I decided to be a business, but it was not until about 2013 that my accountant recommended setting up an S-corp.

    I think for those of us in the creative fields especially all that icky legal and accounting stuff is zero fun and a deep dark cave full of dwarf wielding axes that we avoid like the plague. But, of course, the thing we fail to confront is that thing that comes back to bite us in the a$$.

  • Marsha

    Ha! Great timing!

    I haven’t started my business yet but I was scheduled to have lunch with an accountant today to discuss what legal form it should take. And here I thought I was putting the cart before the horse…!

    Lunch is rescheduled because of the snow problems still in the WNC mountains. But I am coming to Click. I will not be stopped!

    Thanks for this quick breakdown, Christine. You answered several questions.


    • Christine Kane

      Marsha – You are most welcome! “I will not be stopped!” I like that! can’t wait to see you at CLiCK!

    • Christi

      Hi Marsha…. I’m a CPA too and I’ll be at Click….. more than happy to give you some info if you’d like!

  • Michelle

    I hired my first accountant (yes!) and the first thing she suggested was switching my business from an LLC to a corporation. Not only will this save us money on our taxes moving forward, she was able to refile our 2014 taxes under this new corporation and we’re getting back nearly $4,000! I had no idea. This is why you hire professionals. And, since my husband will no longer be handling our taxes, the stress level in our marriage will be nothing like it was last April!

    • Christine Kane

      Michelle! If I could upload a photo of me toasting you with my gorgeous champagne flutes, I would totally do that! i loved reading this!

    • Christi

      I’m a CPA and so excited that you went and got the good advice! So many people think a simple LLC alone will save tax dollars and they are wrong…. Sub-S corp structure will (up to a point) but C corp structure is very bad. There are some clear lines and lots of grey areas. Good for you and congrats on that $4,000!