The downsides of incorporating your business

Keep in mind that I am not saying that incorporating is a bad idea at all. I'm just saying that you should weight all the pros and cons and make an educated and informed decision. Generally speaking (and I mean GENERALLY), a person who is really serious about setting up a business properly should incorporate eventually.

Here are some of the things that you might want to think about before incorporating:

-Most states have an annual franchise tax. In particular, California has an $800 minimum annual franchise tax for corporations, although this tax is waived the first year of operation during the calendar year.

-You cannot just walk away from a corporation. A lot of people don't know this, but once you form a corporation, and if you decide to close up shop and stop doing business, you have to dissolve the corporation. Now, this might not be very hard, but if you need an attorney to help you out, then it can get pricey. Some attorneys will charge several thousands of dollars to do this for you.

What's more, if you owe certain taxes, you will not be able to dissolve your corporation until you make good on your fees.

-If you are running a business as a sole proprietor, and if you are sued, then you can go to court yourself and you can represent yourself. However, if you are incorporated, you will have to hire an attorney to represent the corporation. Because technically, since the corporation is a separate entity apart from yourself, it will need a licensed attorney in order to represent itself.

This could be a problem if you're just starting out your business. For litigation, an attorney can easily charge a $5,000 retainer and the bills can pick up real quick. However, if you are just a sole proprietor and you are operating on your own, they will sue you instead. Now although that doesn't sound good (especially if you have money or assets they can attack), most plaintiffs and their attorneys will think long and hard about filing a $5,000 lawsuit if they know you're broke or don't have enough assets to go after. However, with a corporation, someone else might just simply want to put you out of business, file a lawsuit, get a quick summary judgment and then your corporation is in trouble.

-Let's say that you are starting up a new business, and you're pretty sure you've got a great idea and you feel like you've got a good shot at making it work. But you're not COMPLETELY sure. You might want to wait on your incorporation if:

a.) you don't have any assets, money, or other things a plaintiff can go after

b.) you would like to see your business play itself out and see if it can produce fruit. That way you will know if it's worth it paying the annual franchise tax, incorporating expenses, attorney's fees, etc.

c.) the chances of being sued are miniscule because you will be selling children's books which you will be writing, distributing, and producing yourself. Plus, you will have a limited number of contracts to strike with outside third parties

d.) Say it is October, and you don't expect to turn a profit until January next year, or maybe you don't expect to start producing and distributing until next year. You might as well hold off until you start making profit and save some money on the taxes since taxes go by the calendar year and are not prorated

e.) You plan on operating your business all on your own or perhaps with close friends and family who probably won't sue you. To the contrary, if you are operating with partners, then you should think long and hard about not incorporating. Having a corporation is a good way of getting things on paper and carefully setting forth who does what, who invests what, and who gets what.