by LawInc Staff
August 6, 2016
“Incorporate your business for asset protection,” says your attorney. “Incorporate your business for tax savings,” says your accountant.
Maybe you are a sole proprietor. Maybe you have a partnership. Or maybe your small business is just getting off the ground. No matter what your situation, you’ve probably heard that you should incorporate your business. But what are the advantages to forming a corporation, and what does it really mean to “incorporate”?
Incorporating means evolving from a sole proprietorship or partnership into a company that’s formally recognized by its state of incorporation. In other words, it means becoming a legal business entity of its own, separate from the individuals who founded it.
The actual process of incorporation, however, involves paperwork and filing documents with your jurisdiction’s secretary of state, among other things (a process that the professionals at LawInc.com are able and ready to help you with).
The resulting company structure often falls into two categories: a limited liability company (LLC), or a corporation (typically an “S corp” or “C corp”). Each of these structures, in turn, has their own set of advantages and disadvantages.
We’ll save those for another article. All of these entities, however, share similar advantages over sole proprietorships and partnerships that make incorporating a smart idea.
ALSO SEE: 4 Benefits of Corporations and LLCs
Together, here are the 6 best reasons to incorporate your business today:
1. It Provides for Personal Asset Protection.
This is the number one reason to incorporate. Both corporations and LLCs allow owners to separate their personal assets from their business’ assets. This means that business owners and executives can’t be held personally liable for the company’s debts if the company gets sued or goes bankrupt. Sole proprietors and partners, by contrast, are generally personally on the hook for the debts and liabilities of their business.
2. It Has Certain Tax Advantages.
Although the type of tax benefits available depend on the type of business entity you form, corporations and LLCs generally qualify for additional tax benefits and deductions that aren’t available to individuals. For example, Corporations and LLCs may deduct normal business expenses, including salaries, before they allocate income to owners. As a result, the money you put towards growing your business can be deducted from your business income in determining your actual taxable income, resulting in lower taxes.
3. It Gives You Credibility.
Almost all serious business owners eventually incorporate their business, and being able to add “LLC” or “Inc.” after your business name gives your company instant credibility. Vendors, partners, and even customers are more likely to trust and prefer working with incorporated businesses.
4. It Makes it Easier to Get Cash.
Incorporating your business makes it easier to get cash, which is often tight when you are just starting your business. In particular, it makes it easier to sell stock and give away equity in exchange for money. This is cumbersome or impossible in partnerships and sole proprietorships. Moreover, unlike a proprietorship or partnership, where owners have to rely on their own personal credit, incorporated businesses begin to develop their own credit profile, usually making it easier to get loans and other financing. Finally, potential investors may require you to become incorporated before investing in your business.
5. Incorporate Your Business for Longevity.
Corporations and LLCs continue to exist even when the business’ ownership or management changes. Sole proprietorships and partnerships, by contrast, usually end when an owner dies or leaves the business. A corporation, however, can continue indefinitely until it accomplishes its objective, merges with another business, or goes bankrupt. Put simply, if you incorporate your business, it can go on forever.
6. It Has Certain Branding Advantages.
When you incorporate your business, other businesses may not use the exact same business name in the same state. This helps protect your company from being confused with other companies, and helps strengthen your business’ brand and marketing identity.
There are many other advantages to incorporating your business. There are, of course, a handful of disadvantages as well. (We’ll save those for another article.) Most business owners, however, find incorporating more than worth it in the long run.
If you are considering incorporating your business, talk to an incorporation attorney who can help you decide what type of business entity is right for you.