Owning a small business can be a risky venture. One way to limit your personal liability is by incorporating your business. While incorporation requires more paperwork and expense than a Sole Proprietorship or a Partnership, it offers important legal and tax advantages. Either way, incorporating is a good decision for most businesses, and despite popular belief, it is not just reserved for those that are wealthy businesses and well established. There are multiple benefits of incorporating, all of which you should fully understand before you decide to make your move.
Some of the most popular reasons why incorporating your business should be a priority are:
Protect your personal assets from creditors: There is no doubt that starting your business is exciting, but with that excitement comes the reality that accidents happen and unfortunately businesses sometimes fail. This is where one of the best benefits of incorporating comes into play. By incorporating your business, albeit as a C or S Corporation, or an LLC, you are protecting your personal assets from business debts. If your business falls on hard times, your personal property is off limits to collection agencies. For example, if you cannot pay your business loan any longer, generally, the bank will not be able to come after your home to satisfy the loan. If you have not yet incorporated your business, your personal assets are linked automatically to your business. This may include your car, your home, your investment accounts, and even assets you obtain in the future. Additionally, if you were to file bankruptcy within your business, your personal assets would be used to repay your debt. By incorporating you protect your business from this, which is probably one of the most valuable benefits of incorporation.
Protecting your personal assets from lawsuits: Along with the protection from creditors comes protection from lawsuits filed against your business. Without incorporating, your personal assets remain at risk to anyone filing a lawsuit against your business. These individuals could try to collect on a judgment against you, for example, by taking possession of your home. That means if a customer trips and slips in your store and takes you to court to collect damages, you are personally liable. Incorporating, however, creates a solid barrier between your personal assets and the claims of others. That means if your business is sued, the safety of your personal and family possessions is not at risk. As a responsible businessperson you never want to be caught unprepared. The benefits of incorporating lead specifically to keeping your business operational and the security of yourself and your family intact.
Tax benefits and money savings: Another benefit of incorporating your business, and one of the most crucial to leverage, is the many tax deductions that are available to incorporated businesses. When you go from being a Sole Proprietor or Partnership to a business structure such as an LLC or an S or C Corporation, there are numerous deductions at your disposal that are not available to individuals. Everything from tax deductions on health insurance and life insurance, to saving on self-employment taxes. Side bar: Tax laws are complex, and it is in your best interest to consult with an accountant before claiming any deductions.
Easier to raise capital: It might not be the most obvious benefit of incorporating, but it is true that by incorporating you are making it easier for your business to raise capital. This mostly means that if you plan on borrowing money or applying for a loan, it adds a sense of legitimacy to your business. If you want to accept money from outside investors, you simply sell stock of your company and if you want to borrow from banks, the lenders are more likely to loan you money because your business assets can be held as collateral.
Easier to sell: Corporations and LLCs are generally much easier to sell and are usually more attractive to buyers than a Sole Proprietorship. This is mainly because a new buyer will want to limit their legal and tax exposure and not be personally liable for any wrongdoing on the part of the Sole Proprietorship. If someone buys a Sole Proprietorship, the new owner can be held personally liable for any mistakes or illegalities on the part of the prior owner, even if the new owner had nothing to do with those activities. This is usually not the case with a Corporation or a Limited Liability Company.
Protect your brand: Another benefit of incorporating your business has to do with your brand. Your brand is more than a logo or a marketing phrase. It is the way you operate your business, the look and feel of your location, and the type of products or services you offer. When you incorporate your business, it is not just your name you are protecting; you are also protecting the business overall image. You have worked hard to build your brand and image. By incorporating you can protect it from being used by others for their benefit.
Perpetual existence: When you incorporate, you create a separate and distinct legal entity. This separate and distinct entity can exist almost forever, irrespective of what happens to the shareholders, directors, or officers. It is important to know your business can still be sold or that you may close it at some point. However, with the definition of a Corporation is the business's ability to remain in perpetual existence as its own entity. This important benefit matters because it gives you the ability to create a long-term plan for growth within the business. Investors want to know that your business can go on without you, legally, and it allows the business to remain operational without the need to reestablish itself. That being said, perpetual existence becomes a powerful and necessary tool for any business that wants to establish a strong foundation from which to grow. Corporations have unlimited life.
Transfer your business more easily: Here's one of the benefits of incorporating that many people often miss. Let's say that you want to pass your business on to your child as you get older, but only want to do so in the event of a sudden illness. It is easier to transfer ownership when your business is a Corporation than it is if you are running a Sole Proprietorship. Remember, in a Sole Proprietorship, all of your personal assets are linked to your business. It is not possible to easily value your business for a sale or transfer it to another person until each of these lines of connections to your personal assets are defined and cut. Whether for short- or long-term goals, your business will benefit significantly from incorporating for this reason alone. There are some restrictions, of course, but transferring funds and even business ownership is easier when the business has its own identity.
Privacy and confidentiality: Perhaps the most important benefit of incorporating for some people is the level of privacy that comes with incorporating your business. When you incorporate, you can keep your personal identity hidden. All of your business affairs are private and kept confidential unless you choose to disclose them. Some states do not even require your name to be on any business documents at all.
Increases credibility: Both customers and venders feel more secure and confident dealing with an incorporated entity, be it a Corporation or an LLC as opposed to a Sole Proprietorship. Most businesses that are not incorporated actually miss out on gaining business from the bigger companies due to the fact that the giants of industry simply do not want to deal with individuals. If disputes occur, the giants do not want to be publicly viewed as the bully taking a small individual to court. Therefore, they just do not give their business to Sole Proprietorships. Having an “Inc.” or an “LLC” after your company's name adds credibility and a touch of professionalism to your business dealings, and has the possibility to attract more business.
While it may not be necessary for all businesses to incorporate, most of the time, businesses do benefit from going through the incorporating process. It may seem like a daunting task at first, but with the help of GoLeglYourself.com tools, the process of incorporating is made easy.
If I Incorporate, Are My Personal Assets Protected from Lawsuits?
Once your company is incorporated, the limited liability protection afforded by the incorporation process is NOT automatic, meaning once you incorporate your business, your personal assets are not automatically protected from lawsuits. Ninety percent of business owners think they can enjoy the limited liability protection afforded to them by their incorporated entity. Incorporated entities do not automatically become barriers between your personal assets and your business assets whereby your personal assets are protected from lawsuits. The company actually must comply with corporate formalities in order to