Small businesses and entrepreneurs face many important decisions when first starting, but one of the most important decisions involves whether or not to incorporate. Many small business owners start their companies as sole proprietorships or partnerships where they and their businesses are one and the same. However, there are many benefits to incorporating your business regardless of its size. Both corporations and LLC’s are separate legal entities that enjoy certain legal protections under the law and can provide important benefits to small businesses. Some of the advantages of forming a corporation or limited liability company (LLC) include the following:
- Personal asset protection. Many businesses choose to form a legal business structure to safeguard their personal assets allowing them to conduct their business without worrying that they might lose their home, car, or personal savings because of a business liability. Both corporations and LLC’s allow owners to separate and protect their personal assets. In a properly structured and managed corporation or LLC, an owner should have limited liability for business debts and obligations. Additionally, the owner’s personal assets are protected in the event of a lawsuit or claim leveled against the business entity. This is typically the greatest benefit to incorporating.
- Tax benefits. An LLC is taxed at the same rate as a sole proprietorship while providing limited exposure to personal liability. Although profit and loss typically pass through an LLC and get reported on the personal income tax returns of owners, an LLC can elect to be taxed as a corporation. When an owner sets up a corporation, they are taxed on both the individual and corporate levels. However, a corporation can avoid double taxation of corporate profits and dividends by electing Subchapter S tax status.
- Additional credibility and name protection. Adding an “Inc.” or “LLC” after your business name can add instant legitimacy to your small business. Clients, customers, and third-parties prefer to do business with an incorporated entity. Additionally, in most states, other businesses may not form an entity or use a trade name that is the same name as your corporate name, allowing your business to build market share and brand name recognition.
- Perpetual existence. Corporations and LLC’s continue to exist even if ownership or management changes. Sole proprietorships and/or partnerships end if an owner dies or leaves the business. Incorporating ensures that your company can remain doing business, as well as continue to provide employment and services for your clients should any changes occur in ownership or management.
- Deductible expenses. Both corporations and LLC’s may deduct normal business expenses, including salaries, before they allocate income to owners. Business owners and entrepreneurs should carefully consider whether incorporating their business is right for them.
Whether you are a small business with two employees or a Fortune 500 company, there may be significant benefits to incorporating your business. Before selecting what type of company might be right for you and your business, you should consult an experienced attorney with respect to which business entity may provide the maximum benefit to you and increase your chances of succeeding in the business world.