It’s typical for small businesses to launch their companies as sole proprietorships, which means their business is the same. However, changing a business to a Limited Liability Company (LLC) or corporation can offer many benefits. One of the most important advantages is that an LLC or corporation will protect the businesses’ personal assets should any legal disputes ever happen. There are several other benefits to incorporating a company, which we discuss more below!
As we just mentioned, one of the most important advantages of setting up an LLC or corporation is to protect personal assets. Additional benefits it provides are name protection, and extra credibility as Fox News Network mentions.
No. 1: Personal asset protection. Both corporations and LLCs allow owners to separate and protect their personal assets. In a properly structured and managed corporation or LLC, owners should have limited liability for business debts and obligations. Corporations generally have more corporate formalities than an LLC that must be observed to obtain personal asset protection.
No. 2: Additional credibility and name protection. Adding “Inc.” or “LLC” after your business name can add instant legitimacy and authority. Consumers, vendors, and partners frequently prefer to do business with an incorporated company. In most states, other businesses may not form an entity or use a trade name that is the same as your corporate name. This benefits the business legally and helps in brand-building and marketing.
Do you want to establish credit in your business’ name? Money Talks now explains how a corporation can also help you build credit as well.
Small-business owners have two options for funding company expenses:
Lend your company money from your personal assets and use your personal credit to apply for loans, lines of credit and credit cards for company use.
Establish credit and apply for loans and financing in your business’s name.
If your company’s financial needs are or will be substantial, it’s best to establish an independent financial life for your business. Doing so will take time and will almost certainly require your personal guarantee when you start out. But as with any borrower, once your company’s credit is established, it will be able to borrow on its own.
This leaves your own funds and credit available for personal needs. Separating your business and personal accounts and records also helps insulate your personal finances from the business for purposes of taxes and limiting liability.
Small Business mentions a few more reasons why incorporating your business is best. For one, raising money becomes a lot easier and helps your company continue to develop and grow. Having a corporation also makes it possible to decide how you want to receive money from your company, which is a considerable tax advantage.
Raising Money Is Easier
Corporations also have more ability to raise money, which may make it easier for your business to grow and develop. While corporations can borrow and incur debt like any sole proprietorship, they can also raise money by equity financing, which involves selling shares in the corporation to angel investors or venture capitalists. Equity financing is advantageous in that equity capital generally does not have to be repaid and incurs no interest. (Of course, by issuing shares, you are reducing your percentage of ownership in the company.)
Optimizing Your Income and Taxes
If you incorporate your small business, you can determine when and how you receive income from the business, a real tax advantage. Instead of taking salary from the business when the business receives income, being incorporated allows you to take your income at a time when you'll pay less in tax. You can also receive income from an incorporated business in the form of dividends rather than salary, which will lower your tax bill.
ShopKeep adds thoughts to why having a corporation offers tax benefits and also helps with savings. Here are some examples below on what type of tax benefits having a corporation can provide.
Another benefit of incorporating your business, and one of the most crucial to leverage, is the many tax deductions that that are available to incorporated businesses. When you go from being a sole proprietor or partnership to a business structure such as an LLC, there are numerous deductions at your disposal that are not available to individuals. Everything from tax deductions on health insurance and life insurance, to savings on self-employment taxes. Just remember, tax laws are complex, and it’s best to consult a CPA before claiming any deductions.
Specifically, you may see tax benefits such as:
The ability to deduct business losses.
The ability to claim some of your business investments.
The ability to deduct travel expenses related to your business.
The ability to deduct fringe benefits such as medical insurance.
The ability to claim many daily expenses required to operate your business.
The ability to deduct Social Security taxes that you’re paying into the system.
Plus, if you ever consider selling your business down the line, ShopKeep mentions why having a corporation can make that process a lot easier.
We know that your business is your lifeblood, but let’s be honest, there might be a day when you decide it’s time to sell. As hard as that might be to envision now, it’s always best to prepare for the future. With this in mind, did you know that incorporating your business makes it easier to sell? That’s right! Sole proprietorships and partnerships are traditionally less attractive to buyers, so incorporating will give you a leg up on any competing businesses a buyer might also be looking at. You might ask why this is. Well, here are a few reasons.
Corporations are:
Easier to track and manage from an investor’s point of view than a sole proprietorship.
Investors naturally feel as though corporations are more stable.
Investors can view the business as its own identity, and that means being able and willing to make fundamental changes to it without infringing on your personal rights or needs.
A few more advantages as to why a small business should incorporate CalCPA discusses below. Another big perk that you may not have considered is that a corporation can offer anonymity to its owners.
Perpetual Existence
Corporations are the most enduring legal business structure. A corporation can continue indefinitely, regardless of what happens to its individual directors, officers, managers, or shareholders. This means that by incorporating your business, you may be able to avoid the legal entanglements that could result with other business structures.
Gain Anonymity
A corporation can offer anonymity to its owners. If you want to open a small business and don’t want your involvement to be public knowledge, your best choice may be to incorporate.
You won’t be young forever, and even if you plan to work for some time, it’s also important to consider how to transfer your business. If you choose at some point to have a family member or trusted employee take the company over you should know how to do that. ShopKeep outlines why a corporation makes it possible and, the process will likely be a lot smoother.
Here’s one of the benefits of incorporating many people often miss. Let’s say that you want to pass your business on to your son or daughter as you get older, but only want to do so in the event of a sudden illness. It is easier to transfer ownership and funds when the business is a corporation than it is if you are running a sole proprietorship. Remember, in a sole proprietorship, all of your personal assets are linked to your business. It is not possible to easily value your business for a sale, or transfer it to another person until each of these lines of connections to your personal assets are defined and cut.
Whether for short term or long term goals, your business will benefit significantly from incorporating for this reason alone. There are some restrictions of course, but transferring funds and even business ownership is easier when the business has its own identity.
In closing, if you’re curious about which type of corporation is best depending on your company, here’s a brief overview from incorporate.com:
S Corp, C Corp, or LLC: Which One Is Right for Me?
Business goals aren't one size fits all and neither is incorporating. When deciding which kind of corporation fits your business strategy, consider some of the different benefits that each kind offers. And take a deeper dive with the comparison chart linked below.
S Corporation:
Elimination of double taxation of income
Investment opportunities
Once-a-year tax filingC Corporation:
Unlimited growth potential through the sale of stock
No limit on the number of shareholders
Tax-deductible business expenses
Limited Liability Company:
Simplicity
No residency requirement
Structure flexibility
Cash Money Life also discusses why they feel setting up a corporation for your business is the way to go (which we have reiterated throughout this article). More specifically, they also discuss why setting up an S Corporation is a good idea if you plan to take all the profit.
A Corporation is an entity completely separate from its owners with its own legal and tax responsibilities. A Corporation actually continues to exist even if the ownership dies or changes. You can attract investors by offering the sale of shares of company stock. There’s limited liability for the officers, employees, and shareholders from business debt or lawsuits filed against the business.
A general or C Corporation conducts business, has net profit or losses, pays taxes, and distributes profit to its shareholders. The IRS taxes both corporate profits and dividends paid to shareholders, which are often referred to as “double taxation.”
You can avoid double taxation by creating an S Corporation instead. An S Corp allows the owners or shareholders to report their portion of the profit or loss from the business on their personal income tax returns. In most cases, if you plan to take all the profits from your business, an S Corp is the way to go.
Sources: Fox News Network, Money Talks News, incorporate.com, The Balance Small Business, CalCPA, ShopKeep, Cash Money Life
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