Learn when it makes sense to choose this legal entity.
Are you thinking about incorporating your business? It takes some time and effort to do so. However, there are so many good reasons to select this legal structure. It provides protection, could help you financially, can enhance the image and reputation of your business, and make it simpler to transfer your operation.Â New businesses can benefit, as well as established ones. (Non-profits are one type of business that may not benefit from incorporating.)
This article reveals the top ten times incorporating a business entity will benefit it. This includes when entrepreneurs and long-time business owners need to:
- Protect personal assets from creditors
- Secure personal assets if your business is sued
- Save on taxes
- Improve record keeping.
- Raise capital
- Improve the reputation of your business
- Protect your brand
- Extend the life of the business
- Simplify business transfer
- Continue the business after youâre gone
1. Protect personal assets from creditors
Businesses fail all the time. Naturally, small business owners donât want to think about this possibility, but itâs critical to do so.
If your business fails and you owe people and entities money, creditors may not only come after your business assets but your personal ones, as well. You could lose your home, vehicles, savings, and investments. A business that doesnât make it could destroy your personal and family life.
Iâm not trying to scare you. Itâs more of a warning for you to take steps to protect your personal assets and property from being taken if something unfortunate happens to your company.
Incorporating your business as aÂ Limited Liability Company (LLC), S Corporation (S-corp) or C Corporation (C-corp) protects your personal assets against defaulting on your business debts. If your business falls on tough times, these business structures protect your personal property from collection agencies and legal actions. In short, incorporating helps ensure you wonât lose your home or car because your business failed.Â
If you donât incorporate your business, your personal assets are connected to your business. This includes current assets and things you obtain in the future. If you file for business bankruptcy, your personal assets could be used to cover your debt. Similarly, if you file for personal bankruptcy, your business property, equipment, and other assets could be used to repay your personal debts. Incorporating your small business protects you and your business against all these possibilities because it separates your business from your personal life. This type of liability protection is one of the best reasons to incorporate.
Did you know: Many larger companies incorporate in the state of Delaware to save on their taxes? However, it typically makes more sense for small businesses to get their articles of incorporation and certificate of incorporation through their own stateâs secretary of stateâs office.
2. Secure personal assets if your business is sued
Even the most careful and by-the-book company can be sued. Workplace injuries, property damage that happens when doing business, and work-related errors can result in lawsuits.
While having the proper insurance protection can help cover some of these risks, incorporating your business can add another layer of protection. It can help prevent people or enterprises that sue your company from getting access to your personal property if they win a lawsuit and receive a settlement that your business canât cover.
For instance, if a customer trips or slips and takes you to court to collect damages and youâre not adequately insured, you may beÂ personally liable.Â They could collect on a judgment against you by taking possession of your home, vehicles, or savings â essentially anything you have thatâs of value. Incorporating your business creates a solid separation between yourself and your business. If your company is sued, your personal and family possessions will typically not be at risk.Â Personal liability is a key reason many small business owners incorporate.
Did you know: Self-employment isnât a barrier to enjoying the benefits of incorporating? Many sole proprietors choose this type of business structure to reduce their risks.
3. Save on business taxes
Another significant benefit of incorporating your business is to take advantage of the many income tax deductions that are available to incorporated companies. Corporate tax rules are more favorable to most business owners than personal ones. These benefits are not available to sole proprietors and other unincorporated businesses. Incorporating allows you to:
- Spread out your losses over a more extended period
- Deduct startup and operational expensesÂ
- Deduct the benefits you provide to employees
Your municipality and state may offer tax incentives if you incorporate, as well. A tax expert with business know-how can advise you on the tax benefits you could enjoy if you select this legal entity.
4. Improve record keeping
The Internal Revenue Service (IRS) requires incorporated businesses to provide a significant amount of information to file their tax returns. This requires considerable record keeping. While this added burden can be time-consuming and costly, donât consider it a burden. Owners of incorporated businesses usually find that having complete records helps them manage their businesses better.
Another benefit of enhanced record keeping is that you will have many documents you need to apply for loans or get other types of financing whenever you need them.
5. Raise capital
Incorporating typically makes it easier for companies to raise capital or apply for a loan. It adds a level of legitimacy to your business for potential investors. There are also benefits to incorporating when it comes to getting a business bank account and other financial services and building business credit. Always talk to a financial advisor, banker, or accountant to determine whether it makes sense to incorporate.
6. Improve the reputation of your business
There are many ways to enhance the reputation of your business, including encouraging word of mouth, asking for positive Google ratings and reviews, and engaging with community organizations. Another option is to incorporate it. Taking this step conveys to prospective customers that your company is a serious one and not a fly-by-night operation.
7. Protect your brand
Your brand is much more than your logo or tagline. Itâs how you operate your company, what your business location looks like, the types of products and services you offer, and perhaps most importantly, your overall customer experience.Â
Incorporating your business is a big step toward protecting aspects of its brand from being used in undesirable ways or without your consent. Incorporation help you protect:
- Your business name.
- Your brand visuals, including your logo, slogans, and colors.
- Your trademark, which includes any words, phrases, symbols, or design elements that distinguish your business from others.
Partner with a law firm experienced in working with small businesses to ensure you adequately protect your brand.
8. Extend the life of the business
In legal terms, when you incorporate, you protect your organization for all time.
You can always sell or close your business. However, if neither of these things happens, your company will remain in existence in perpetuity as its own entity with the full protections provided through incorporation. The company can remain operational and profitable no matter what happens to the people who run it. This is important because:
- You can create and execute a long-term business plan
- The business can stay in operation without ever having to reestablish itself.
Perpetual existence is a crucial benefit of incorporation for any business that wants to establish a strong foundation on which to grow over the long term.
Â Tip: A business legal expert can advise you on the technicalities of setting up a corporation, including building a board of directors, creating articles of organization, getting a corporate identification number, setting up bylaws, and whether you need to publish an annual report.
9. Simplify business transfer
Letâs say you want to pass your business on to a relative someday, perhaps when youâre too old or ill to run it. It may be easier to transfer ownership and funds when the business is a corporation than if you are running a sole proprietorship. Transferring funds and business ownership is easier when your business is incorporated and has its own identity.
10. Continue the business after youâre gone
If your business is incorporated, it can continue to exist even after you pass away because it is its own entity. You will need to be replaced, but business continues as usual. This is true even if you leave your business to your heirs. Your company will not have to go through probate court if incorporated, and you leave it to your heirs in your will. If you want your company to continue after youâre gone or pass it on to your heirs, an excellent first step is to incorporate it. Then work with an estate lawyer to get the legal advice you need to ensure your will and other paperwork are set up correctly so the transition can be handled smoothly.
From startup to business continuation and transfer after youâre gone, incorporating a company can help you protect it, make it run more efficiently, and enhance its reputation. Itâs an excellent way to make the organization youâve created stronger and more stable. You owe it to yourself to speak with your lawyer to find out if a corporation is the correct type of entity for you.