One of the most crucial decisions you will make as a business owner is deciding what type of entity your company will have. Should you be a sole proprietor? Maybe a partnership? A corporation or an LLC?
There’s no one-size-fits-all answer to this and it will ultimately come down to what your professional goals are and a number of other unique factors. Realistically, you should probably speak with your attorney, tax advisor and/or accountant before making a final decision.
To prepare you for that conversation, let’s explore some of the advantages of incorporating your company.
Protection of your personal assets
One of the nicest things about a corporation is that it creates legal separation between the business and its owners. In other words, the liabilities and debts of the business are the responsibility of your company and not you as an individual. As such, this provides protection of your personal assets. So, if you can’t pay off a loan or someone sues your company, in most instances, your personal assets (i.e. your home, vehicle, bank and retirement accounts, etc.) cannot be touched. That’s peace of mind.
Tax advantages
Corporations are typically eligible for certain tax deductions that LLCs, sole proprietorships and partnerships are not. By default, the business pays applicable taxes and its owner pays income tax on their personal earnings. This double taxation can be beneficial because it prevents owners from having to pay exorbitant self-employment taxes. In other words, with a corporation, you would only pay self-employment taxes on your salary as opposed to the entire taxable income from the business.
A variety of funding options
We recently shared seven ideas for funding your business, but if you incorporate, you’ll be able to add another option to the list. For instance, with a corporation, you have the option to sell stock (ownership shares) of your company to raise additional capital. If your company is an S corporation, you can have up to 100 shareholders. C corporations can sell shares to an unlimited number of shareholders. In either case, you’ll enjoy an additional funding option that you wouldn’t have with other types of business entities.
Increased credibility
There’s just something reassuring about seeing an “Inc.” after a business name. Whether or not it’s true, being incorporated can give the impression that your business is more credible and worthy of respect, which can create a stronger sense of trust with your customers and prospects. And if you happen to be in a very competitive niche, incorporation can give you a leg up on the competition.
Perpetual existence
Because corporations are separate legal entities, they can exist perpetually. In other words, the existence of the business won’t cease when the owner dies. It can be sold or bequeath to someone else, which means your company can continue operating indefinitely, as long as ownership shares are held. So, your hard work and legacy can continue long after you’re gone.
Is incorporating right for you? There are certainly plenty of advantages to this type of business entity. But, again, the best way to decide whether it’s right for you is to speak with your accountant, attorney, mentor or advisor. And, of course, if you have any other business planning questions, please don’t hesitate to contact us. We’re here to help!