How many Sales required to become Incorporated?

Question

I am currently a sole proprietorship and i would like to consider to become Incorporated. I thought the sales volume is approx. $250K then you should consider becoming Incorporated. Anything below that dollar amount is not worth it YET! I know becoming Incorporated in California you pay $800 annual fee. In addition, to a lot of other fees i researched.

I just was curious about the sales volume.

Answer 1

The current cutoff or minimum income for incorporation purposes is an annual gross income of $50,000 which covers most salaried workers.  A far better alternative to incorporation is to carry specific insurance to protect product safety, employee theft, customer accidents and and finally use the incorporation fee to invest in stocks and bonds.

Good luck!

Answer 2

I was told by my CPA that when my net income (not sales) reached $70,000 then it was worth pursuing incorporation. However, you situation may be different - you did not mention what industry that you are in.

Sales is an arbitrary number and should not be used to decide on incorporation because you do not pay taxes on your sales, but rather on your net income or profit. You may have $250,000 in sales, but $200,000 of write offs and then only have pay taxes on $50,000 - in that case, it may not be worth incorporating. On the other hand, you may have sales of $100,000 and only $5,000 in write offs and then have to pay taxes on $95,000 and the benefits of incorporation may be more.

You are not paying an $800 annual fee to the state, you must pay a minimum of $800 in state taxes regardless of your income. If you make $20,000 in profit or more, than you are already paying $800 in state taxes. However, this dynamic changes when you become an employee of your company, because you may pay yourself all your profit (because you need the money for your personal income) and then the company would show a profit of $0 and still have to pay the $800. And then, you would personally still have to pay state taxes on your personal income. On the other hand, you could leave the profit in your company and pay business income taxes on the money (which is at a lower rate than personal income taxes).

Other costs to consider:

- Paying to have both your personal and business taxes done. You will now have 2 separate returns.

- Cost of paying yourself as an employee (you must be an employee of your corp.) and having to pay employment taxes, disability, etc to the state. Plus the risk of missing deadlines and payments for quarterly filing to the state and having to pay late fees and penalties. This is why most companies use a payroll service (this has additional fees).

Cost of insurance for your industry may be more worth while than incorporating if you are just looking for protection, but this is not the only benefit from incorporating.