by Sheren Javdan
April 30, 2014
It’s important to consider the benefits of corporations and Limited Liability Companies (LLCs) when starting your business. Owning your own business can be risky because businesses are constantly exposed to lawsuits. This translates to the actual owners of businesses being personally exposed to lawsuits if they do not own their business via a corporation or LLC.
Sole proprietorships and partnerships hold the business owner and business as one. As a result, the owner will be held personally liable for all the debts and liabilities of the business.
One way to protect yourself from personal liability is by forming either a corporation or LLC for your business. Corporations and LLCs offer business owners many advantages including, but not limited to, tax advantages and protection of personal assets from legal judgments or claims against the company.
Corporations and LLCs are legal entities that are wholly separate from their owners. From a legal standard, a corporation or LLC can carry on the operations of the business by bringing forward lawsuits, entering into contracts, incurring taxes, committing crimes, and purchasing and selling property.
Benefit 1: Protection of Personal Assets
One major benefit of corporations and LLCs is protection of the business owners’ personal assets. All business operations expose owners and shareholders to possible lawsuits. For example, a customer may slip and fall in your store, or burin him or herself on a hot drink your restaurant. Liability even goes as far as a customer injuring themselves by a defective product that you either manufactured or sold.
Without a proper entity structure, owners of businesses that are unable to cover the damages sought by plaintiffs and creditors can be held personally liable to pay any and all damages arising out of a lawsuit. Creditors have the legal right to seek personal assets such as homes, cars, bank accounts and investments to fulfill their damages against a business.
As completely separate legal entities, corporations and LLCs are separately held responsible for their own debts and liabilities. Creditors can only seek damages from the corporation or LLC directly, not from the owners or shareholders.
It is important to note that if a corporation or LLC does not follow the formalities associated with maintaining an entity, it will be subject to “piercing of the corporate veil.” A corporation can be pierced when it is inadequately capitalized, the funds are commingled with personal funds or if the owners fail to follow corporate formalities.
When a court allows a corporation to be pierced, they allow plaintiffs and creditors to pursue their claims against the individual owners of the entity.
Benefit 2: Tax Savings
Another benefit of owning your business as a corporation or LLC is saving on taxes. By forming a corporation and electing to be taxed pursuant to subchapter “S” of the Internal Revenue code (also known as an “S” corporation), you can save a lot on taxes.
Many accountants advise their clients to form S corporations to save money doing taxes. Without an S corporation, all business income is subject to self employment taxes. Self employment taxes include Social Security, FICA and Medicare. When your business is taxed as an S corporation, only the salary paid to you by the corporation is subject to self employment taxes.
LLCs can also take advantage of these tax savings by filing a form with the IRS. The “S election” allows LLCs to be treated as S corporations for tax purposes only.
Benefit 3: Business Continuity
Another benefit of owning a corporation or LLC is business continuity. A business that is not incorporated will only last as long as the owner is alive. Corporations and LLCs however, typically continue to exist beyond the death of the business owner.
The existence of a corporation or LLC is not dependent on the life of the owners, rather the company will continue even after any changes to ownership. The business can continue to flourish until the business is sold or goes bankrupt.
By forming a corporation or LLC, business owners can ensure that the objective and mission of their business will continue to exist for many years.
Benefit 4: Business Credibility
A business’ reputation and credibility is one of the most important tools it has in running a successful business. Adding a corporate designator such as “Inc.”, “Corp.” or “LLC” after a business name adds instant legitimacy and credibility to a business’ image.
The public, including vendors, customers, and employees, are more likely to do business with a company that includes a corporate designator because it adds stability and permanence to the business. These factors convey a message of commitment to promote a successful business.
In addition, other businesses in your geographic vicinity may not be able to form an entity using the same name as your corporation or LLC. Thus enforcing stability and trustworthiness into your brand.
Branding is a huge marketing tool and can generate millions of dollars in revenue.
Choosing the appropriate business entity for your business will maximize your business’ profits. To ensure your new business is successful and lawfully operated, choose the correct entity with an attorney.