Starting a business can be one of the most rewarding and satisfying undertakings a person can pursue. For some, it involves chasing and achieving a personal dream, and for others, it provides an opportunity for freedom and flexibility from a corporate job. Launching a new business venture comes with a lot of hard work and many challenges. Countless tasks impose themselves upon entrepreneurs trying to get their businesses off of the ground.
With so much to accomplish, business owners may not be aware that incorporating can be an important step toward ensuring the success of a business. Whether it's a sole proprietorship or a large-scale operation, the advantages of forming a corporate entity are numerous. Advantageous tax benefits, credibility with customers and the protection of personal assets are just a few of the many reasons business owners choose to incorporate or form a Limited Liability Company (LLC). In fact, an ongoing business that has yet to incorporate would benefit the most. With an established and growing clientele, there may come a greater chance of getting sued, and a corporate entity would help shield its owner's personal assets. One responsibility of the owner is to realize just how important it is to have a lasting and proven business structure.
Here are the most critical items to consider when selecting your business structure:
- Protection of personal assets- Sole proprietors and partners have unlimited personal liability for business debt or lawsuits against their company. Creditors can attach homes, cars, savings or other personal assets. Incorporating or forming an LLC helps separate your personal identity from your business identity. Corporate shareholders or LLC members have only the money they put into the company at risk.
- Pass-through taxation- For sole proprietors and partners, company profits/losses pass directly through to their personal tax returns. For corporations, profits are taxed, distributed to shareholders as dividends and taxed again on a personal level. This "double taxation" can be avoided while still enjoying the benefits of personal asset protection by forming an LLC or by electing an S Corporation (a provision permitting certain small business corporations and their shareholders to elect special income tax treatment). S Corporations and LLCs can be taxed just like partnerships.
- Uninterrupted business- Sole proprietorships and partnerships may automatically end or become legally entangled when an owner dies or retires. Corporations and LLCs are enduring legal business structures. They continue regardless of individual officers, managers or shareholders. Corporation ownership may be transferred, without substantially disrupting operations, through the sale of stock.
- Access to capital- Sole proprietorships and partnerships may find investors hard to attract because of personal liability. Investors are more likely to purchase shares in a corporation where they can separate personal and business assets.
- Credibility- Adding "Inc." or "LLC" to your company name helps a business seem larger and more established.
How does one go about incorporating or forming an LLC? A common misconception regarding the incorporation process is that only a lawyer can guide entrepreneurs through the process. Lawyers can be a trusted and knowledgeable source for incorporation, but legal fees can quickly mount. Numerous entrepreneurs have chosen to forego a lawyer and instead use a service company, such as The Company Corporation or CorpAmerica. Service companies can provide valuable timesavings for business owners learning about the business formation process. The service can be more affordable than going to a lawyer, quick and convenient. Service companies provide the opportunity to incorporate or form an LLC over the phone or on the Internet. In most cases the process can be completed in less than ten minutes. A lawyer or service company can help you answer questions such as "Which entity type is right for me?" and "What states are the most advantageous for forming an LLC?"
Most business owners choose to incorporate or form an LLC in the state in which they plan to conduct business. Typically, filing in your home state is the least complicated, and less expensive as it helps avoid paying franchise taxes and filing annual reports in multiple states. For many entrepreneurs, they find it necessary to expand their businesses into many additional states. Doing business in multiple states requires that companies "qualify or register to do business" in each state. A corporate agent can be very helpful in making small business owners aware of any additional filings that may be required by law.
No matter which business structure you choose, it is important to carefully examine the advantages and benefits of incorporating or forming an LLC. Why leave your personal assets exposed and advantageous tax benefits on the table? Service companies are ready and waiting to assist you in taking your business to the next level.
Construction Business Owner, August 2007
