When Should You Form a Business?
POSTED ON February 4, 2023
BY Jake Kessenich

You’re a small business owner, whose small operation has begun to rake in some real cash. You’ve been running your business as a sole proprietorship for a while now, but as your profits increase, you’re beginning to wonder if it’s time for a change.

Here are a few essential questions to ask yourself:

  1. How much is your business making per year? Every business is unique, but there is a ballpark range where we believe you should consider a change. Transitioning into a separate entity (LLC or Corporation and potentially becoming an S-Corp) is something we recommend considering when your net income is around $60-70k.
  2. Are you happy with your current structure? Moving into an S-Corp has several tax benefits for business owners, but it can be a huge change. Investigate the administrative changes you would be required to make.
  3. Are you ready for the additional cost? Beyond structural changes, you’ll be responsible for different costs and may need additional help. This includes a required annual fee for your business entity as well as additional bookkeeping that you may want to invest in, changes to insurance, a separate business tax preparation fee, and other costs.

If these questions feel overwhelming, that’s okay! Doing your own research is just the beginning. An important resource in making your decision is your accountant. Your accounting team will be able to offer you valuable insight to help you decide what’s best for you, your business, your family, and your future.

Here at Encurio, we recommend that our clients schedule an Entity Consultation to discuss whether an entity formation is the right choice for them from a tax perspective. In this meeting, we‘ll take a closer look at the timing of the switch, the tax benefits, potential structural changes, and future plans for the company. We also always encourage clients to discuss the transition with their business attorney as well, as tax savings are just one part of this decision.

If you’re a client and you’re interested in discussing the benefits of for forming an entity, contact us here. If you’re not a client, but would like to get started on your journey with us, click here to schedule an Intro Call!