• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar
  • Skip to footer
  • Advertise
  • Submissions
  • About Us
  • Contact Us
  • Jan 26, 2021
  • Startup
    • Creating a Plan
    • Funding a Startup
    • Franchise Center
    • Getting Your Office Ready
    • Making Your Business Official
    • Marketing Your New Business
    • Personal Readiness
  • Run & Grow
    • Customer Service
    • Human Resources
    • Innovation
    • Legal
    • Operations
    • Risk Management
  • Leadership
    • Best Practices
    • Communication
    • Green Initiatives
    • Open Culture
    • Strategic Planning
    • People Skills
  • Sales & Marketing
    • Advertising and Lead Generation
    • Marketing Innovations
    • Marketing Plans
    • Online Marketing
    • Relationships
    • Sales Activities
  • Finance
    • Budgeting and Personal Finance
    • Payments and Collections
    • Tax and Accounting
    • Pricing Strategy
    • Working with Investors
    • Working with Lenders
  • Tech
    • eCommerce
    • Hardware
    • Software
    • Security
    • Tech Reviews
    • Telecom
  • Shop

SmallBizClub

Helping You Succeed

efile4biz banner
Home / Startup / Making Your Business Official / Why You Should Incorporate Now!
Why You Should Incorporate Now!

Why You Should Incorporate Now!

1609 Views

Jun 6, 2014 By Nellie Akalp

Many business owners think they are “too small” to incorporate. They wait until business picks up or they are ready to expand to tack on that legal structure. Here are some top reasons why you should consider incorporating now instead of waiting:

 
1. Separates personal and business
 
When you’re operating your business as a sole proprietorship or partnership, there’s no separation between the business and the owner. In this case, the owners are the business…they’re responsible for signing any contracts, and taking out any loans or lines of credit on a personal level. In addition, if there’s any kind of issue with the business (e.g., a customer sues or creditors seek action), the owners are personally liable…and that means personal assets and savings can be at risk.
 
One important reason for incorporating a company or forming an LLC is to protect the owners/stockholders against personal liability. These official business structures put a wall between the owner and the business. As long as the company complies with all the necessary corporate formalities, then creditors/court judgments generally cannot reach an owner’s personal assets to satisfy the company’s liabilities. For this reason, people usually want to incorporate/form an LLC before launching their product or service, since the risk of liability increases once you add in customers, users, or clients.
 
2. Prevents misunderstandings among founders/partners
 
When a business has more than one founder, there’s always a chance of an argument over how equity should be split—no matter how close the owners may be. Incorporating a company and issuing stock to the founders will prevent misunderstandings among equity splits. Even if you choose to form an LLC and not issue stock, you will still have formal paperwork in place that outlines how ownership is split.
 
3. Allows you to issue stock options
 
Many entrepreneurs choose to compensate third parties (i.e., employees, vendors, or contractors) by granting stock options or offering the opportunity to purchase equity at a low price. This is particularly attractive at the beginning of a business when cash is tight. It is possible to put together a pre-incorporation agreement stating that someone will get equity (stock) upon incorporation, but it’s a lot simpler to incorporate the company first, and then make these kind of offers.
 
4. Allows you to get funding and establish business credit
 
If a third party investor wants to invest in your business, there obviously needs to be some kind of entity set up to accept the investment. Venture capitalists and other investors often prefer to work with Corporations, since they allow for different classes of stock.
 
If you’re not looking for VC or angel funding, you still may benefit from a formal business structure. That’s because owners in partnerships and sole proprietorships need to sign contracts in their own name. That means you’ll need to rely on your personal credit and assets to take out a loan or ask for a line of credit. But once you form an LLC or corporation, the business itself begins its own credit profile.
 
5. Gives your business more credibility
 
You may find your sales grow after forming an LLC or incorporating, as adding an LLC or Inc. after your company name boosts your credibility in the eyes of some customers. In some industries, a formal business structure is required to win certain contracts. And some larger companies are more comfortable hiring a business, rather than a sole proprietor to do the work.
 
6. Adds a layer of privacy
 
When you incorporate or form an LLC, there’s an added layer of privacy. In many cases, the registered agent of your corporation goes on record, and not your home or business address.
 
7. Offers potential tax benefits
 
In some cases, corporate tax rates are lower than individual tax rates. And corporations and LLCs often qualify for additional tax benefits and deductions that aren’t available to individuals. Many sole proprietors choose to incorporate as a way to lower what they owe in self-employment (SE) taxes. Of course, specific circumstances vary, and you should consult with a CPA or tax advisor about your own particular tax situation.
 
Incorporating or forming an LLC is a big step, but offers some key benefits, even for the small, solo, or family-owned business. Having an Inc. or LLC after your company name isn’t just for big business. Just keep in mind that once you decide to create a formal business structure, you’ll have to keep up with ongoing filing obligations—but it might be one of the smartest steps you take for your business and personal finances.  
 
This was originally written by Nellie Akalp for Small Business Trends
 

Filed Under: Making Your Business Official Tagged With: Business Credit, Business Entity, Equity, Incorporation, LLC, Nellie Akalp, Privacy

Nellie Akalp

Nellie Akalp

Nellie Akalp is a passionate entrepreneur, small business advocate and mother of four. As CEO of CorpNet, a legal document filing service, Nellie helps entrepreneurs start a business, incorporate, form an LLC or set up Sole Proprietorships (DBAs) for a new or existing business. She has formed more than 100,000 corporations and LLCs across the U.S., building a strong passion to assist small business owners in starting, running, and protecting their small businesses the right way. Check out her Google + Page.

Related Posts

  • Do These 6 Things First for Your New Business
  • 5 Ways to Be Smart with Your Business Loan
  • An economics lesson for growing companies

Primary Sidebar

From the Editor’s Desk…

What We’re Reading

Leading With Gratitude, by Adrian Gostick and Chester Elton
Research shows that grateful bosses have happier more productive workiers and they fare better themselves. Here’s how to do gratitude right

Working From Home: Making the New Normal Work For You, by Karen Mangia
Look good on Zoom; When to accept meetings; How to pass on new workloads, and other helpful tips.

Blue Collar Cash: Love Your Work, Secure Your Future, by Ken Rusk
Guidance to those who want to skip the student loans and 4 years and pursue blue-collar careers that lead to success, from someone who did it.

Making Conversation, by Fred Dust
When work meetings become joyless time suckers, here’s advice for conversations designed to move things forward with clarity and context.

  • Facebook
  • LinkedIn
  • RSS
  • Twitter
Suscribe to our newsletter
efile4biz banner

Run & Grow

Don’t Ignore the Importance of Naming Your Business

Jan 26, 2021 By Brian Wallace

7 Corporate Wellness Trends To Look Out For In 2021

Jan 26, 2021 By Victoria Hill

Increase Customer Retention & Revenue in Challenging Times

Jan 26, 2021 By Jeff Bullas

8 Ways To Stay Competitive In Today’s Technical World

Jan 25, 2021 By Marty Zwilling

efile4biz banner

Footer

About Us

Small Biz Club is the premier destination for small business owners and entrepreneurs. To succeed in business, you have to constantly learn about new things, evaluate what you’re doing, and look for ways to improve—that’s what we’re here to help you do.

  • Facebook
  • LinkedIn
  • RSS
  • Twitter

Copyright © 2021 by Tarkenton Institute, Inc. All Rights Reserved | Terms | Privacy