If your Passion is Bringing Profits, Incorporating May be Right for You

Let’s say you’re a fan of Puerto Rican music, or a breakfast cereal nut, or a Harry Potter fanatic. You built a web site to share your enthusiasm with the world, and you put contextual ads on it to earn a little extra cash. And let’s say it’s really catching on, so much so that it’s looking more and more like a real business and not just a hobby. In fact, you’ve come to the point where you’re not only offering content, but also your own line of t-shirts or other merchandiseand you’ve attracted the attention of a new media mogul who wants to invest.

It may—may, mind you—be time to consider incorporating.

Whether you’re generating income from your ads or from selling on the web, you’re probably already what’s called a “sole proprietor.” As a sole proprietor, you and your business are essentially one and the same. You’re liable for your obligations and your taxes are paid as personal income taxes.

What’s in it for you
It may sound intimidating, this idea of going from being a person to being a corporation, but it doesn’t have to be. Incorporating offer a number of possible benefits, including limited liability, possible tax savings, a heightened brand perception (which sounds better, Mike Mattis, Some Guy Who Started a Little Web Site about Wine,” or “Michael Mattis, CEO, Bon Vivant Media, publishers of Vinapedia.net?”) and financial flexibility.

Take your pick
There are different types of corporations, each geared for different types of businesses.  Typical types include:

C Corporation—This is the standard, most common form of corporation. In fact, the “C” simply stands for “corporation.” Clever, yes? In a C corp., the shareholders cannot be held personally responsible for the corp’s obligations, though they can be “double taxed,” meaning that corporate profits are taxed at both the entity and individual levels—that is, dividends allocated to shareholders are taxed as well as the profits that the business makes. More on C Corps »

S Corporation—An S corporation is another standard corporation type, but one that has a special tax status with the IRS that avoids double taxation. In an S corp., the profits or losses of the corporation are passed to shareholders, who report them in their individual tax returns. More on S Corps »

Limited Liability Company (LLC)—An LLC has some of the advantages of a C corp. and some of the advantages of an S corp. Like a C corporation, the individual owners, usually called members, are typically not personally liable for the corporation’s obligations. Like an S corp., taxation is passed on to the members, although the LLC is required to file a tax return with the IRS. In addition, LLCs are highly flexible in structure and management. Unlike either a C or an S, an LLC has different ownership rules. For example, a written consent from all members must be obtained prior to expanding ownership. More on LLCs »

The options don’t end there. There are also General Partnerships, Limited Partnerships, Limited Liability Partnerships and Nonprofit Corporations. For more on these entities, check out Yahoo! Small Business’s Guide to Incorporation, powered by BizFilings. If you’re pretty sure that you’re ready to incorporate, but are unsure which entity is right for you, take a look at the BizFilings Incorporation Assistant tool.

Bear in mind that you may be required to acquire business licenses and/or permits, so you’ll want research the laws in your specific locale. And, of course, it may not be the right point in your entrepreneurial career to incorporate. Maybe you’re not ready to be the Man in the Gray Flannel Suit. You’ll want to weigh all of your options carefully. It takes a pretty serious commitment, one that can turn a labor of love into just plain labor if you’re not ready for it.

Take advantage of these additional Yahoo! Small Business resources to help turn your passion into a successful small business:

Small Business Startup Checklist

Business Plan Essentials

Ten Tips for Starting a New Small Business

Learn the Lingo

—Michael Mattis, Blog CEO, President and Chairman of the ‘Bored’