Although the plethora of inexpensive online incorporation and LLC formation services would have you believe that all you need to do to incorporate your small business is fill out a simple form, pay a few dollars, and voila! your business is incorporated, this is even less true if you have already been running your business as a sole proprietor.
The mere act of incorporation does not transfer the existing business assets and liabilities to the new corporation. And while it is almost always a good idea to either incorporate or form a limited liability company (LLC) in order to reduce your personal liability and protect your personal assets, there are some administrative tasks and potential tax liability associated with changing the form you use for your small business entity.
You’ve Incorporated–Now What?
Let’s assume you’ve already incorporated. You’ve determined that the name you chose is acceptable under the New York Business Corporation Law. You’ve run a search on your company name (or had an experienced lawyer run one for you) to ensure you haven’t violated another company’s trademark under state or federal trademark law. If you formed an LLC, you’ve published notice of the formation in two newspapers. Here on Long Island, Newsday is a good choice for a daily paper, and Nassau and Suffolk Counties have many options for weekly local newspapers.
That’s All, Right?
Not quite yet. There are numerous administrative tasks, including:
Obtain a new Employer Identification Number (EIN). You can learn how to do this here at the IRS website. If you are forming a one-member Limited Liability Company (LLC), you can choose to be a “disregarded entity” for tax purposes, and continue to use your own Social Security number. However, I would strongly encourage the use of a separate EIN so you don’t share your personal number with employees or vendors. You want to protect your Social Security number against identity theft.
Your assets must be transferred from your name as sole proprietor to your new company’s name. This must be done formally. In exchange for the assets, you will receive shares (corporate stock) of your new corporation.
Your small business bank accounts must be closed, and new ones opened in your new corporate or LLC name. Insurance companies need to be notified. Any permits or licenses that have been issued to you need to be formally transferred. Inform your employees, customers or suppliers. Should your small business own any intellectual property registered with the United States Patent and Transfer Office, it may need to be assigned to the new owner. If your business owns a car or truck, you need to change the title and pay fees to the New York Department of Vehicles. Any transfer of real property must be reported to the clerk’s office in Nassau or Suffolk Counties.
Additionally, corporations must have formal meetings, take minutes and prepare and ratify resolutions for all the changes.
Are You Done Yet?
There may be both state and federal tax consequences from transferring assets and liabilities from a sole proprietorship to either a corporation or an LLC. If you are transferring real property, New York State may assess a transfer tax on any mortgage still owing.
If you have previously taken deductions on your income tax returns for your small business assets (i.e. furniture, computers), depending on how you transfer those assets to the new corporation or LLC, you may create a taxable event. There are two ways an item that has already been depreciated by the sole proprietor can be transferred. You can make either a capital contribution or a sale in your capacity as sole proprietor to your new corporation or LLC.
The mechanics of choosing the method of transfer for tax purposes is beyond the scope of this article. It is best before you make any transfers to speak to a qualified CPA as well as an attorney.
Should You Just Forget the Whole Thing?
Absolutely not. Despite some expense, paperwork, time and energy there are numerous reasons you should incorporate your small business or form an LLC. To list just a few: Protection of your personal assets should your business fail or get sued; savings on employment tax and deductions for insurance; protection of your business assets should you get personally sued; ease of raising funds to expand your small business.
When you are ready to take your Long Island small business to the next level, contact a small business lawyer in your area.