One of the most critical decisions you will make as a business owner is choosing the business entity type for your company. Sole proprietor or partnership? Limited Liability Company (LLC), or corporation?
For many of the entrepreneurs that I work with, incorporating offers a variety of advantages legally and financially over operating as a sole proprietorship, partnership, or LLC (Limited Liability Company). You should talk with your attorney and accountant or tax advisor before you select a business structure because it’s important that you fully understand the pros, cons, and your compliance responsibilities. To get you up to speed for that conversation, let’s explore some of the main advantages of incorporating your business.
Unlike a sole proprietorship or partnership, a corporation is legally separate from its owners. Because the liabilities and debts of your corporation are the responsibilities of your company rather than you as an individual, your personal assets are protected. So, if you can’t pay off a loan or someone sues your business, under most circumstances, your personal assets (home, retirement account, car, etc.) can’t be taken as restitution.
When you incorporate, your business name automatically becomes protected within the state where you’ve registered your company. No other corporation or LLC (in that state) that sells similar products or services will be allowed to use that name. For more extensive name protection, consider filing for a trademark. That will protect your name throughout the entire U.S.
Before you select your business name, I recommend that you do a corporate name search and trademark search to see if it’s available. That way you won’t spend time and money trying to register a name that is already taken by another company.
RELATED: 5 Steps for Naming Your New Business
Corporations are often eligible for tax deductions that sole proprietorships, partnerships, and LLCs are not. By default, a corporation pays the applicable corporate tax rate on its taxable income, and its owners pay income tax on their personal earnings from the business. This double taxation can benefit owners who, if the business were a sole proprietorship or partnership, would find themselves paying an exorbitant amount in self-employment taxes.
In a corporation, only the owners’ salaries are subject to self-employment taxes. As a sole prop or partnership, all taxable income from the business would flow through to the owner’s individual tax return and be subject to self-employment taxes.
Something many corporations are looking forward to for tax year 2018 is a reduction in the federal corporate income tax rate. The recent tax bill that was signed into law lowers the rate from 35% to 21%.
Corporations may sell stock (ownership shares) of their companies to raise money. This can provide much-needed capital for growing your business. If your company is a C corporation, your business can sell shares to an unlimited number of shareholders; if you elect to have S corporation tax treatment for your corporation, you may have up to 100 shareholders. In either case, you have a funding advantage that LLCs, sole proprietorships, and partnerships do not.
There’s something about having “, Inc.” following your company name that commands respect. With a formally registered business, you may find that prospective customers, vendors, and project partners have more confidence and trust in your company.
As a separate legal entity, a corporation has perpetual life. That means that its existence doesn’t end when the owner dies or leaves the company. You can sell, bequeath, or otherwise give ownership shares of the business to someone else; your corporation can continue indefinitely as long as ownership shares are held. Only until you file articles of dissolution to close the business will your corporation cease to exist.
If after you’ve had discussions with your attorney and accountant you decide to move forward with incorporating your business, you will need to file Articles of Incorporation with the state in which you want to register your corporation. There are other essential tasks to complete, as well, so that your business meets all legal and financial requirements. As you work on filing your business registration paperwork, consider seeking the help of an online document filing service to ensure your documents are accurate and on time.