Choosing how a business is organized, taxed, and protected is one of the most important first decisions you will make as a new business owner.
While most businesses make the decision to incorporate right at the start of the business, some wait too long and lose valuable benefits year over year. Depending on the business activity, and its plans for growth, forming an LLC or incorporating can be a valuable and strategic decision for you and your business.
Starting? Hiring? Or growing? We encourage you to educate yourself on the benefits of forming an LLC, corporation, or nonprofit. Here are some bullet points to get you started:
1. Give it life
The best way to understand a corporation is to imagine it being its own person or “entity.” When you form an LLC or incorporate, you’re creating a legal entity, separate from its owner(s). In other words, the corporation exists independent from the owner(s) and its employees.
In a sole proprietorship or general partnership (where the owners are the business), what affects the owner may affect the business. Any personal debt or liability of an owner or partner allows the creditor(s) to pursue the assets of the business, whether or not the debt or liability has any relation to the business directly.
By forming an LLC or corporation, the personal finances of an owner(s) remain separate from the finances of the business, making it easier to manage & grow it!
2. Tax benefits
Small businesses can avoid “double-taxation” by taking advantage of the options given to a corporation by the states. Some options include filing as an LLC (Limited Liability Company) or incorporating & filing as an S-Corporation, which allows the taxable income to flow directly to the officers/members without being taxed twice. The best part is that you can do this and still have the tax benefits of the corporation!
Related Article: Taking Care of Business: 3 Options for Incorporation
3. Build your brand
Branding yourself by establishing a professional identity helps increase credibility with your customers. Most businesses choose to incorporate a business to prove their validity to both customers and providers.
While Tax benefits & Liability Protection are significant, there are also mental & emotional benefits that go beyond the tax & legal stuff.
What started as an idea becomes reality. Sometimes this psychosomatic step of seeing the business become its own entity will motivate and inspire you to bring growth and success!
4. Reduce chance of tax audit
Sole proprietors tend to be more likely to file incorrect returns, and quite bluntly, tend to under report revenue or over report deductions. Because of this fact, the IRS tends to audit a much higher rate of sole proprietor tax filings vs. corporate filings. For example, in 2006, a Schedule C filer stood a 1 in 32 chance of being audited. For non-business filers, the odds were around 1 in 124. Simply put, sole proprietors are significantly more likely to be audited!
5. Make changes
As much as we like to believe that all business owners will remain forever committed to the success of the business, there are times when an owner or partner will need to leave or even dissolve the business. Regardless of the reasons for the change, having the business be a separate entity allows easy transferring of interest from one person to another—or even dissolution.
6. Liability protection
One of the big benefits of forming an LLC or incorporating is the limited liability protection of the shareholders (and the business). When incorporated, debt and liability against a specific shareholder remains separate from the corporation. The contrary is also true since debt or liability against a corporation does not open the doors of shareholders’ assets to the creditor(s). In a sole proprietorship or general partnership, the owner(s) remain completely liable to any debt or liability placed against the business. Also, if a business is unable to pay a debt, the creditor can go after the assets of an owner(s). The limited liability of an incorporated business is sure to add protection to the business!
7. Sell It
It could be a change, an exit strategy, or your retirement. There are many scenarios where an owner or partner will need to leave—or even sell—part of the business or the whole thing. Regardless of the reasons for leaving or selling, being incorporated allows easy selling of interest from one person/entity to another. If you decide that selling your business is the right exit strategy for you, then you want to make sure you prepare accordingly for Success!