Who Should Incorporate?
Any United States citizen over the age of 18 can incorporate in the U.S., incorporating has never been easier.
Should You Incorporate?
If you or your business has assets that you would like to safeguard, incorporating or forming a Limited Liability Company is definitely worth your consideration. The most-often cited reason for incorporating a business is to safeguard the personal assets of the owners, known as the shareholders of the corporation, or members of a limited liability company. By incorporating or forming a Limited Liability Company (LLC), owners may engage in business without exposing their personal property to undue risk. Forming an LLC or incorporating your business is one of the best ways to protect you from personal liability. Other than the obvious slight expenditures up front, and the need to maintain the corporate formalities, there is no “downside” to having a shield in place against liability.
Another reason owners incorporate their businesses is for the potential tax advantages that corporations provide. Though a “C” corporation is subject to the “double taxation” pitfall, this can be avoided, if appropriate for your business, by establishing your business as an “S” corporation with pass-through tax benefits.
Most of the businesses you see around you with any type of potential business or tax liabilities are formed as corporations in order to provide the safeguards mentioned above. This is especially true of the professions (doctors, lawyers, accountants, architects, etc.) and manufacturers on all levels (from a local micro-brewery onto the Anhueser Busch’s and Miller’s of the business world) or any other type of business with regular exposure to these liabilities.
Benefits of Incorporating or Forming an LLC
Corporations and LLCs are separate legal entities that provide compelling business, legal, and tax advantages. By forming a corporation or LLC, you can:
- Reduce your Personal Liability: While owners of a sole proprietorship or general partnership have unlimited liability for both business assets and personal assets, including their homes, cars, bank accounts, and even retirement accounts, owners of corporations maintain separate business and personal identities. This translates into mitigated, or limited, risks to your personal assets.
- Reduced Taxation: Corporations are taxed at a lower rate than individuals, with certain business expenses, such as Health Insurance, Business Travel, Client Entertainment, etc., becoming business expense tax deductions instead of coming from your, or the other share holders’, earned income.
- Improve your Credibility: A corporate structure can send a powerful message to your customers, suppliers, competitors, and other business associates about your commitment to serious business and the ongoing success of your venture. For many, "Inc." or "LLC" symbolizes permanence, credibility and stature--a definite added value to you and your company!
- Attract Investors and Investment Capital: Corporations may raise capital through the sale of stock. Investors may prefer to purchase shares in a corporation due to reduced personal liability.
- Ensure a Continuous Life: Corporations can be enduring legal business structures, with a life that may extend beyond the illness, departure, or death of its owners. Incorporating avoids the legal entanglements or, termination of business that can incur if a partner or sole proprietor dies or departs.
- Transfer Ownership: Incorporating allows you to transfer business ownership through the sale of stock.
- Centralize Management: As a corporation, your business’ board of directors holds the power to make major business decisions and binding agreements, as opposed to a partnership, which puts this power in the hands of each general partner. So rather than worry that somebody could make a decision that could result in serious financial difficulty to you or your company as a whole, incorporating assures that all major players in your company stay on board and informed.
Those who hire your services may insist that you incorporate your company for various tax reporting or liability reasons . For example, if a company pays you as an independent contractor, there is a risk that IRS may deem that you are actually an employee and hence make the company that hired you for your services liable for payroll taxes and may run the risk of incurring severe penalties if they did not withhold for such. In instances like these, your client may prefer to hire your corporation instead of you directly, and thus forgo having to go through the entire 1099 or employee classification hassle.
There are no income requirements or thresholds for forming a corporation--you can start as small as a one-person operation or be as large as Coca-Cola; the sky really is the limit!
Those who want to decrease their legal risk.
Incorporating is one of the first legal steps towards taking your business venture to the next level and important if raising capital is necessary. A Savvy investor would review the business model and position looking for signs that the business is a serious venture and will go a long way, incorporating is a critical step towards investors considering investing capital in your enterprise.
Owning investment real estate in a properly structured Corporation, Limited Liability Company or Limited Partnership will provide many of the same business liability protection, asset protection and tax benefits as outlined above.