We often talk about the value of incorporating a business and share some of the most common entity formations entrepreneurs choose to incorporate as.
Why is it important to incorporate a business? Incorporating a business allows you to create a business structure that acts as a legal entity separate from yourself. The business structure you incorporate as impacts many aspects of your startup, ranging from the personal liability you face to what you pay in taxes. Let’s look at some of the reasons why it’s critical to incorporate a business and some of the dangers facing unincorporated small businesses.
1. Protection of Assets
Most small businesses start off as a sole proprietorship. This is a default business structure. A sole proprietorship is affordable, requires filing little paperwork, and allows the owner of the business to take full responsibility of the business.
However, one of the downsides to remaining a sole proprietor is that the entity formation does not provide limited liability protection. In the event of an unforeseen circumstance, a sole proprietor is held fully responsible because their business is not a legally separate entity. The only way a small business may receive this form of protection is by incorporating or forming a limited liability company (LLC).
Limited liability protection draws a clear and legal line between your professional and personal assets. If something unforeseen should negatively impact your business, only the company’s assets would be impacted by the situation. Your personal assets would not be at risk because they are protected by limited liability.
2. Easier to Establish Credibility
Several industries ranging from retail to hospitality require businesses to build and maintain a strong brand reputation. Customers should feel safe shopping in your storefront or staying in your lodging area or space. They should be able to trust that your products are high quality and do not easily break or injure them after use.
Incorporating a business helps to build and establish credibility. The “LLC” or “Inc.” that follows your business name gives your business an extra layer of legitimacy. This helps customers feel comfortable about making purchases and encourages vendors to do business with you.
3. Receive Tax Benefits
Did you know you can receive certain tax benefits when you incorporate a business? Forming an LLC or incorporating as a corporation allows you to qualify for certain tax deductions. You may also be able to lower the amount you pay in self-employment taxes. These tax benefits are often not available for unincorporated businesses like sole proprietorships.
Curious about more tax benefits you may receive from incorporation? Meet or speak with a local CPA to ask additional questions about tax benefits and learn which deductions may be applicable to you.
4. Additional Privacy
Sole proprietors fill out legal documents pertaining to their business using their personal information. This information, including your name and home address, is made publicly available.
Would you rather keep this information private? Incorporating a business allows you to add a layer of privacy to your personal information. For example, you may appoint a registered agent for the business. An RA will accept service of process on your behalf and deliver this paperwork discretely at your physical place of business.
You may also obtain a tax ID known as an employer identification number (EIN). This tax ID may be used in lieu of your social security number (SSN) on business paperwork and act as a safeguard to protecting that valuable information.
5. Easier to Access Funding
Are you seeking outside investors to help finance your business? Many investors prefer to finance incorporated businesses over unincorporated businesses.
For example, a venture capitalist may choose to invest capital in an incorporated business like a corporation. This allows investors to establish shares that may be divided among the owners and investors of the business.
Should I Incorporate My Business?
It is not a requirement for entrepreneurs to form a formal business structure for their companies. However, incorporation does create a foundation that protects a growing business and its owners from day one.
Not sure which entity to incorporate as? Consult a CPA or accounting professional. They may provide you with advice about which entity formation is the best fit for your business. Once you feel comfortable about the process, you may incorporate and receive extra peace of mind in knowing your business, and self, are protected through this legal framework.
Deborah Sweeney is the CEO of MyCorporation.com. MyCorporation is a leader in online legal filing services for entrepreneurs and businesses, providing start-up bundles that include corporation and LLC formation, registered agent, DBA, and trademark & copyright filing services. MyCorporation does all the work, making the business formation and maintenance quick and painless, so business owners can focus on what they do best. Follow her on Twitter @deborahsweeney and @mycorporation.
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