By: Barry E. Haimo, Esq.
April 21, 2016
Why Incorporate Your Business?
It’s the American Dream to start your own business. There’s nothing like being your own boss, making your own decisions, and working on your own schedule.
But running a business is a lot of work. And if you’re lucky enough to have a successful business on your hands, you want to ensure both you and your business are protected from any potential situation that may arise.
For that reason, one of the most important aspects of your business will be deciding how you want it to be structured and organized.
While you may have heard of incorporating a business, you may not know exactly what that entails. So let’s first understand what it means to incorporate a business and why incorporation might be right for you.
What Is Incorporation?
When you incorporate your business, you are basically creating a new legal entity that is separate from those who created and operate the business.
Depending on the nature of your business and your business strategy, there are four main types of entities you can choose from:
- Limited Liability Company (LLC)
- S Corporation
- C Corporation
- Limited Partnership (LP)
When you decide to incorporate, you will need to know a few things about your business, such as:
- The business’s purpose
- The names and addresses of all incorporators
- The types and amount of stock (equity) the corporation will be allowed to issue
- The rights and privileges of the holders of the different stocks (equity)
Benefits of Incorporation
There are a number of benefits for incorporating your business. Here are a few of the most important ones:
Protect against personal liability. If your business isn’t incorporated, there isn’t a separation between you and the business. So if there’s an issue and a customer decides to sue the business, you are personally liable and your hard-earned assets could be vulnerable. As a separate legal business entity, though, the business is treated as a separate entity from the owners. And if your business is sued, you won’t have to risk your own personal assets.
Credibility. By simply being incorporated and having an LLC, Inc, or LP after your company’s name, you will most likely attract more customers. Incorporation creates for your business the perception that it is more legitimate than an unincorporated business and you are not operating it out of your house – even if you are. Bigger companies might feel more comfortable working with a business, and some contracts may even require you to be incorporated.
Potential tax benefits. There are advantages and disadvantages with respect to taxation when incorporating. Each entity has different tax ramifications. For example, LLCs can be taxed in four ways: 1) as a disregarded entity; 2) partnership; 3) c-corporation; and 4) s-corporation. You must seek competent representation with a CPA in order to ensure your legal and tax matters are handled properly.
Management and Operation. Different types of entities have different structures. Corporations typically have centralized management, whereas certain types of LLCs or limited partnerships, for example, have more focused management. The right entity depends on the facts and circumstances of each founder’s operation and vision.
Exists in perpetuity. A partnership or proprietorship is dependent on those who created it because there is no separation. If something happens to the sole proprietor of a business, the business could easily go under. Establishing a corporation, however, allows your business to exist in perpetuity or to have unlimited life. Basically this means that if something happens to the founders, directors, shareholders, employees, etc., the corporation can continue to exist indefinitely.
These are only a few of the many advantages of forming a corporation for your business. If you have further questions or want to see if incorporating your business is the right solution for you, consult with an experienced business planning attorney today.
Barry E. Haimo, Esq.
Strategic Planning With Purpose
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