Starting a business can be a risky adventure. One way to limit your personal liability is by incorporating your business. While incorporation requires more paperwork than a sole proprietorship, it offers some important legal and tax advantages.
What Does it Mean to Be Incorporated?
Before we can talk about the benefits of incorporation, it is important to understand what it means. Quite simply, incorporation is the process of defining your business structure, both legally and strategically. A business becomes incorporated when the owner(s) file incorporation paperwork with the state. Often what is known as the Articles of Incorporation is filed which names individuals to serve as directors, identifies the business name and address of operations. When a business becomes incorporated it is recognized by state law and is viewed as a separate entity from an individual.
Benefits of Incorporation
Personal Asset Protection
As we alluded to above, when you incorporate a business you create an entity that is entirely separate from yourself. This is a great way to protect your personal assets. As a separate legal entity, a corporation can own property, conduct business, incur liabilities among other things. Most importantly, a corporation is responsible for its own debts. That means creditors of a corporation can seek payment only from the assets of the corporation and not from the personal assets of any shareholders, directors, or officers. This means you can conduct business without risking your home, car, savings, or any other personal property. Sole proprietorships or partnerships do not give business owners this sort of protection.
Credibility and Name Protection
A corporation is often perceived as being more stable than unincorporated businesses. In other words, adding “Inc.” or “LLC” after your business name can add a sense of legitimacy and authority that was not there before. Consumers, vendors, and partners often prefer to do business with an incorporated company.
Also, in most states, other businesses cannot form an entity or use a trade name that is the same as your corporate name. This helps protect your brand identity and offers some legal benefits.
Another major benefit to incorporated businesses is that it can continue to exist even if ownership or management changes. In fact, a corporation can continue indefinitely, despite what may happen to individual directors, officers, managers, or shareholders. Conversely, sole proprietorships and partnerships end if an owner dies or decides to leave the business. By incorporating your business, you may be able to avoid any future legal entanglements that often result with a changeover in other business structures.
Depending on how you choose to incorporate your business, there are many tax benefits available. Corporations are taxed on its profits. Those taxable profits can be reduced by qualified business expenses such as operating expenses, advertising expenses, travel expenses, and more. Incorporated businesses may also be able to deduct employee salaries, health benefits, contributions to retirement plans, and more. However, the taxation of corporations is complicated, and different structures have different tax advantages and disadvantages. It is best to meet with your tax advisor to discuss which corporate structure is best for your business.
Easier Access to Capital
At some point, your business will likely need to raise funds to grow your business or pay off debts. This task is usually easier for corporations as they can issue shares of stock. Banks also prefer to lend money to corporations than to sole proprietorships or partnerships. This makes getting a loan through your bank much easier than the alternative structures.
Incorporating your business comes with many important advantages. However, there are many options to consider. It is best to assess the tax implications of incorporating your business with your CPA or tax advisor before making a decision on which structure to go with.
Thinking of incorporating your business? Robert Hall & Associates is here to help! Our business tax advisors will walk you through the entire process step by step, including weighing the advantages and different advantages of the different corporate structures. Call us at (818) 242-4888 or sign up for a free 30 minute consult to get the conversation started.