By Dustin Ray, Chief Growth Officer and Co-CEO of Incfile
From non-fungible tokens (NFTs) to Bitcoin mining to cryptocurrency trading, the blockchain-based economy is booming. According to research and advisory company Gartner, blockchain business value will exceed $3.1 trillion by 2030. The reasons why are easy to understand. Many are attracted to the virtual ledger’s abilities to sidestep intermediaries, reduce costs, and provide greater transparency.
With cryptopreneurs – veterans and newbies alike – creating businesses almost daily, it is inevitable that the question comes up of whether to formally incorporate or not. So, what are the pros and cons of transforming a blockchain business into a Limited Liability Company (LLC), S-Corporation, or C-Corporation? Also, which entity is best?
Benefits of incorporating as an LLC, S-Corporation or C-Corporation
Perhaps the most important reason crypto traders, mining firms, and consultants incorporate is to enjoy friendly business friendly tax breaks. For example, in the world of DeFi trading, the IRS treats capital losses in cryptocurrency trading as casualty losses that can be written off. Similarly, cryptocurrency miners can deduct the depreciation of their mining equipment as business expenses.
Moreover, crypto businesses structured as LLCs and S-Corporations serve as pass-through entities, meaning no double-taxation. Instead, the profits flow directly into the owners’ personal accounts, and the income is taxed on their personal returns only.
A critical reason crytpopreneurs may choose to incorporate is to protect themselves from limited liabilities. The crypto market is still in its infancy and invites a substantial amount of risk. Forming an LLC or corporation insulates personal assets from debts, bankruptcies, and lawsuits that may arise from poor investments, turbulent cryptotrading, and other unfortunate events.
Crypto businesses looking to raise capital to create new coins, apps, or services through initial coin offerings (ICOs) may want to take a look at forming a C-Corporation. This status is particularly attractive to potential investors, including venture capitalists and shareholders, because it allows wider ownership of the corporation.
Finally, the issue of credibility is another attractive feature that comes with formally incorporating a cryptobusiness. Having the “LLC “ or “Corp” in the business name is a mark of professionalism and legitimacy that entices new customers to purchase products and services, helps secure bank loans, and invites business partners to invest further in a blockchain business’ growth.
Pitfalls of incorporation
One of the necessary headaches attached to entities with limited liability status is the requirement for vigilant record keeping. No matter the business type, owners of LLCs and corporations must keep careful records of business expenses and separate them completely from personal finances.
The easiest way to accomplish this is by setting up a separate business checking account to track business expenses. However, banks usually charge several fees and additional monthly expenses for these sorts of accounts.
Those considering the C-Corporation route should also bear in mind that these are far more costly to operate, see double taxation, and involve complex tax schemes. Entrepreneurs in the early stages of their cryptobusinesses may want to, therefore, consider incorporating as an LLC or S-Corporation before leaping directly into C Corporation status.
Whether to jump in or not is just one-half of the question. The other half is choosing the best entity type that suits particular business needs and takes into account the stage of business formation and long-term goals. Corporations, for instance, are perfect for raising venture capital but, as mentioned earlier, invite additional costs and tax complications compared to LLCs.
When it comes right down to it, the advantages and disadvantages of incorporating a crypto-based business are pretty much the same as those for a simple brick-and-mortar shop or e-commerce site. Owners must weigh the tax benefits and personal liability protections that formalizing a business affords against the added strain and costs of careful accounting and additional bank fees. There is much to ponder in crafting a new business in the exciting new crypto world of the blockchain. Whether one is a seasoned graphic designer creating NFTs or a new miner looking to find crypto gold in the Wild West of the DeFi economy, these questions are worth seriously mulling over.
Dustin Ray, Chief Growth Officer and Co-CEO of Incfile
Dustin Ray leads strategic partnerships, business development, and growth initiatives for Incfile. Prior to Incfile, Ray developed and launched the Urban Music and Lifestyle division for Monster Energy, where he ran operations nationally for integrated marketing campaigns and celebrity endorsements. He also operated a graphic design company that serviced the music industry – a 10-year experience in the cutthroat world of music that prepared him for the equally competitive technology sector. Since joining Incfile, he has helped transform the company from a small startup to a nationally recognized brand and go-to resource for business formation services. His vision is to uplift other entrepreneurs to attain the same trajectory for their own businesses. Ray hails from Texas and holds a BBA in Marketing from Texas State University. When he’s not running Incfile’s business strategy, he helps his friends and family with their personal YouTube channels as a creative outlet.