Andy Bechtolsheim wasn’t teaching them a lesson in the power of reacting forward, since they were already working on the business. He was teaching them a lesson in common sense. With a sole proprietor or partnership, there is unlimited personal liability for business debts or lawsuits. That means if you went out of business, creditors could target your personal assets, such as your home or vehicle, as well as the personal assets of any investors who, by investing, become partners in the business. When you incorporate, you are responsible only for what you have invested in the corporation. That advantage alone is worth the few dollars it costs to incorporate.
Here are some other practical advantages to incorporation:
Legal Protection for a Purchaser
That asset protection is also important if you ever decide to sell your company. The purchaser of an incorporated business will not be personally liable if the seller did something unlawful, whereas if someone buys a sole proprietorship, they can be held liable for what happened in the past. Many successful small businesses are purchased by larger businesses, so the investment in the paperwork is essential to make that a smooth transaction.
Tax Savings
There are several tax advantages to incorporation. Your company becomes a distinct legal entity, even if it remains no more than just a file on your desk. That means that any business-related expenses, including some home-office operating costs, become tax deductible. Sole proprietors can deduct business-related expenses, too, but the benefit is often less. Sole proprietors report their business income on their own personal tax returns (Schedule C), and they also pay self-employment tax on the profit (Schedule SE), which at the time of writing is over 13 percent. In some cases, sole proprietors end up paying more in taxes due to self-employment taxes, and they are said to have some of the highest audit rates with the IRS.
Credibility
The abbreviation “Inc.” or “LLC” after your company’s name adds a touch of professionalism and credibility on any company stationery, especially with customers and lenders. Image is important, and customer confidence is tied to perceptions of your company.
The Simple Process of Incorporation
Incorporating a company is easy, takes only a few minutes, and costs less than a couple of hundred bucks. Costs and registration requirements can vary by state. However, dozens of online companies specialize in incorporation and have all this information, and the entire process can be completed by yourself online. Simply search in your browser “how to incorporate a company.”
Be aware that some companies, particularly larger outfits that advertise regularly on TV, will sting you with add-on services and unnecessary monthly-maintenance fees. Their online narrative is also designed to make the process sound complicated and fill you with fear so that you will hand over a bigger check. Don’t fall for this trick. Read the small print or avoid these firms. Seek out a company that makes the process transparent and effortless, since it absolutely should be.
Though filling out the forms is easy, incorporation does require you to make some initial, important decisions about your company. These require some advance consideration, which are as follows:
•Which state will you incorporate in?
•What is your company name?
•What type of corporation is it?
•Who is the registered agent?
•What are the articles of incorporation?
Which State Will You Incorporate In?
Most single-person corporations choose to incorporate in the state where the owner lives and works, and that’s what I recommend except in a few rare cases.
One reason some people choose incorporation in a state other than the one they live in is because tax rates vary from state to state. Some states, like California and Hawaii, have tax rates around 10 percent. States like Florida, Nevada, and Washington currently have no state income tax, and that can be advantageous in certain situations, especially if you plan to sell your company at some point.
However, if you’re operating your business in a different state, incorporating in a tax-free state won’t excuse you from paying business taxes in your home state. Every state requires businesses operating within its borders to pay tax on sales or revenue that originates within the state.
Some large companies incorporate in other states that are particularly pro-business, like Delaware. The Delaware General Corporation Law is considered one of the most advanced and flexible corporation statutes in the United States, and for that reason, over a million companies, including half of Fortune 500 firms, choose Delaware. However, if you are still at the stage of simply incorporating an idea, I recommend just using your home state.
What Is Your Company Name?
This is probably the hardest question to answer, since many people drive themselves crazy trying to come up with a catchy name for their company. Choosing your business name is obviously important, but it’s less important than people think. In short, my advice is to spend no more than a few hours considering possible names, and do not pay good money to hire anyone to do this for you.
During the online incorporation process, the service will run a company name search to ensure that your choice is unique in your selected state, and then you register the name.
Here are my tips for naming your company:
•The more the name reflects your product or service, the easier it is for the customer to remember.
•Trust your instincts. If it feels right to you, go with it.
•If you’re unsure, take a plain piece of paper and scrawl out a series of words and names, playing an association game. Keep going till certain words and ideas stand out. Go with it.
Don’t stress about or get stuck trying to come up with a memorable company name. Remember: A successful product or service is what turns a company into a household name, and a great name can’t hide a lousy product or poor service. Your winning idea is going to make or break your company, not what you call it. That said, if your business provides a service, the name should reflect that service, so it’s easy for customers to remember when they need you.
For instance, who can deny that the name PayPal describes its service well? You might be surprised to learn, however, that the company was founded in 1998 as Field Link, and it was soon renamed Confinity. Only when Confinity was acquired by X.com and went public was the firm renamed PayPal. What about eBay, the company that acquired PayPal for $1.5 billion in stock in 2002? eBay was originally called AuctionWeb. Obviously, weak original names did not stop either company from succeeding.
Companies with great names like Circuit City fail as much as ones with nonsense names like Flooz.com, and yet nonsense names don’t stand in the way of success, either. I have heard management consultants wax lyrical about the brilliance of the Amazon name, but founder Jeff Bezos actually came up with it on the fly. He wanted a name that was at the head of the alphabet, so it would show up first on list services when he started as an internet book retailer.
Many successful companies change their names over time as their businesses evolve. For instance, Google was originally called BackRub. Then a year later, after a simple brainstorming exercise between the two founders, they changed the name to Google. Even Microsoft started out as two words, Micro and Soft.
In the end, choose a name that works right now. If you decide to change the name, it’s easy to do and does not cost anything. You do not have to go through another incorporation process. You simply update the information online through the state website where you are registered.
What Type of Corporation Is It?
Like choosing a company name, choosing a corporate structure