Incorporating your business has several advantages over the other common business entities that you have to choose from. This article will explain seven of the advantages of incorporation, and maybe one or more of them will be just what you're looking for as you decide whether to incorporate your own business or not.
It's pretty much a given that hard work and a little luck goes a long way towards helping you succeed. But a little knowledge, especially when it comes to properly setting up your business, will help you stay successful.
While most business people give lots of thought to location, store décor, hiring employees, customer service, and management issues, choosing the proper business structure doesn't get the attention that it deserves.
Many entrepreneurs don't realize this, but the organization type they choose can often determine the difference between success and failure, especially in today's litigious society. If you have a desire to succeed, you need all the advantages you can get. High on the list of safe bets is incorporating your business.
Incorporating, while definitely not for everyone, offers several distinct legal and financial advantages over the other types of entities.
Here are seven advantages of incorporating your business:
Always be sure to consult with your business advisor and/or attorney before evaluating any important legal or financial decisions.
- Asset protection - If you operate as a partnership or sole proprietor, you're subject to virtually unlimited personal liability for lawsuits or business debts.
If you ever go out of business or get sued, your personal assets including your home, vehicles, jewelry, bank accounts, etc. are all up for grabs.
This is generally not the case when you incorporate. When you incorporate you're responsible only for your investment in the corporation.
In fact, the limited liability feature of a corporation, while not a rock solid guarantee, is for sure one of the best reasons for incorporating.
- Corporations are usually much easier to sell and are more attractive to prospective buyers than either a partnership or sole proprietorship. This is due to the fact that a new buyer won't be held personally liable for any wrongdoings or missteps on the part of the previous owner.
For example, if someone buys a sole proprietorship, the new owner can be held personally liable for any mistakes or legal violations on the part of the previous owner, even if the new owner had nothing to do with it! But with a corporation, this is usually not the case.
- Tax savings - Incorporating your business provides several tax advantages that don't exist for other business entities.
When you incorporate, you create a new, separate, and distinct legal entity. Because of this, many transactions can be structured between you and your corporation to save a lot of money on taxes.
One example: If you own a building, you can rent office or warehouse space to your corporation and claim depreciation and other tax deductions for it. Your corporation can in turn claim the rental expense. You can't do this if you're a sole proprietor or a partner in a partnership.
- Privacy and confidentiality - Incorporating is a great way to keep your identity as well as your business affairs private and confidential.
If you want to start a business, yet remain anonymous, a corporation is the best way to do it. States such as Delaware, Florida, and Nevada offer substantial privacy protection for corporations and their shareholders.
- Easier to raise capital - When you want to raise money through loans or investment, being a corporation can make finding and getting the capital you need much easier.
You can simply sell shares of stock if you want to take on investors. If you need a loan, a corporation adds clout when dealing with lending institutions.
- Perpetuity - As mentioned above, when you incorporate your business you create a new, separate, and distinct legal entity. This separate and distinct entity (the corporation) can live on almost forever regardless of what happens to the shareholders, directors, or officers.
This isn't the case with partnerships, sole proprietorships, or even limited liability companies. The loss of the owner or a partner will either end the business altogether or throw it into a maze of red tape.
- Increases credibility - In today's world, most people feel more confident and secure dealing with a corporation as opposed to other business entities. Having CORP. or INC. after your company's name adds an instant air of credibility and professionalism to your business dealings.
While incorporating provides several legal and liability advantages, as I've said before, it isn't for everyone or every business. But you owe it to yourself to find out if it can help you!
Alex Goumakos is a CPA and business advisor for
Active Filings LLC.
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