Many of us either run or work for small businesses, or freelance in order to provide for ourselves and our families. And for a while, weâ€™re able to get by running our day-to-day operations without a hiccup. But do you know when you should incorporate your business, or even the reasons why you should consider incorporating?
When we begin a new business, we often create sole proprietorships, where we and our business are considered one in the same in the court of law. By choosing to incorporate, we essentially make it public that we are separate, meaning the law can no longer seize personal assets to cover expenses against the corporation.
So, why should we consider incorporating our small businesses? How can we truly benefit from this? If you want to learn the answers to these, and when you should consider pulling the trigger, letâ€™s continue.
Why Should We Consider Incorporating?
We know that a corporation is considered separate from the owner and their assets, but there are specific ways your small business can benefit from this process. Here are a few ways you can reap the benefits.
Personal Asset Protection
If you choose to form a limited liability corporation (LLC), you will be considered separate from your personal assets should you ever be sued or have charges levied against your company. If you properly structure your company â€“ and yes, big or small, you run a company â€“ you should have, at the very least, limited liability for your business debts.
Tax Benefits and Flexibility
Did you know that a limited liability corporation is taxed the same rates youâ€™re taxed as a sole proprietor? If you run a small business with a handful of employees, you can choose to be taxed as a corporation or pass your profits and losses off to the LLC and get these reported on your personal income tax returns, as well as those of your employees.
If you choose to be taxed as a corporation, you will be taxed both individually and corporately, though the corporation can be saved from double taxation of its profits if you choose Subchapter S tax status.
While ownership of your company may change hands, and managers are likely to come and go, by incorporating your small business, your business will exist regardless of changes in personnel. If you were to pass away with a sole proprietorship, or if you or your partner chose to part ways, your company would cease to exist. Choosing to incorporate can save your company from coming to a halt should anything happen to the you.
Company Name Protection
Most states have laws in place that will prevent another company or individual from using your exact LLC or corporate name in that specific state. In the realm of the internet, where a company can fall victim of slander in the blink of an eye, this is a greater benefit than many realize. Think of all of the websites where you can rate businesses. You probably thought of at least one or two off the top of your head.
Well, there are plenty of these sites out there, and considering how easy it is to sign up for an online account, a displeased customer can try to defame your company name â€“ but only if youâ€™re a sole proprietorship. The second your company becomes a limited liability corporation, this kind of action is considered illegal. Incorporating your business protects your name recognition in the eye of the public while aiding in your current and future marketing endeavors.
When Should We Incorporate?
Before we get to this point, we need to dissect the differences between a corporation and an LLC. Both are considered legal entities that separate our personal assets from our companies, but both also receive certain legal protections that you wouldnâ€™t receive as a sole proprietor.
By forming an LLC or corporation, your liability for business
obligations â€“ such as debts â€“ is significantly reduced.
Your business has limited ownership, can be owned by another corporation, and the owners donâ€™t need to be U.S. citizens. However, there are a few differences between the two:
- If you form a corporation, you are allowed to issue stock shares to attract potential investors with a stake in your company â€“ this isnâ€™t an option if you form an LLC.
- Another benefit of choosing to incorporate is that you and your partners who own a portion of the company can split the businessâ€™ profits and losses with the business, thus lowering your tax rate.
- The other main element that separates an LLC from a corporation is that with the LLC status, you and the other owners of your company can report your profits and losses on your personal tax returns, whereas that is not an option if you become a corporation.
When should we incorporate our businesses? BEFORE we can conceivably see a situation that could arise in the near future where your personal assets could be seized for any legal reason. We have worked our tails off to get to where we are, and our possessions are our own. Just because we run small businesses does not mean we should lose what we worked for if things go south for our companies.
However, if you could benefit from the tax breaks and flexibility provided to corporations, there are plenty of resources online that can not only tell you whether youâ€™d benefit more from forming an LLC or corporation, but can help you complete the process without ever leaving your office.
Take the time to truly consider incorporating your small business. Thereâ€™s a good chance you could protect yourself and your family from falling on hardship should you choose incorporating your company. However, the choice is yours to make.
Bradley Derringer is a blogger for Tech Breach, giving you the latest on all things tech.
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