Why Incorporate?

While many business owners give a lot of thought to products, services, location, store décor, customer service, hiring employees and management issues; they fail to give proper attention to the structure of the business.

 

Many small business owners don't realize that the business form they choose can often times be the difference between success and failure, especially in today's competitive and litigious marketplace.  Successful entrepreneurs need all the advantages they can get.  The most common types of ownership are sole proprietors, partnerships, corporations and limited liability companies.  For purposes of this article, I will refer to “incorporation” for the formation of either corporations or limited liability companies.

 

Incorporating, while definitely not for everybody, offers several distinct and money-saving advantages over the other types of entities. Here are some of those advantages:

 

Asset Protection

If you operate as a sole proprietor or partnership, there is virtually unlimited personal liability for business debts or lawsuits. This means that if you go out of business or are sued, your personal assets such as homes, jewelry, vehicles, savings, etc. are vulnerable. This is generally NOT the case for those who incorporate.  Through incorporation, only investment in the corporation is exposed. The limited liability feature of a corporation, while not a guarantee, is DEFINITELY one of the most attractive reasons for incorporating.

 

Marketability of the Entity

Corporations and limited liability companies are generally much easier to sell and are usually more attractive to buyers than either a sole proprietorship or partnership.  This is because a new buyer of a corporation will not be personally liable for any wrongdoings on the part of the previous owners.  Conversely, if someone buys a sole proprietorship, the new owner can be held personally liable for any mistakes or illegalities on the part of the prior owner…even if the new owner had NOTHING to do with the situation!  This is usually NOT the case with a corporation.

 

Tax Savings

When you incorporate, there are tax advantages at your disposal that are difficult to accomplish with other business entities.  By incorporating, you create a separate and distinct legal entity.  This separation creates an opportunity to take advantage of transactions that you can structure between you and your corporation to save on taxes. For example, if you own a building, you can rent office facilities to your corporation and claim depreciation and other deductions for it.  Your corporation can then claim the rental expense.  You cannot do this if you are a sole proprietor or a partner in a partnership.

 

Access to Capital

When you're looking to raise money through investment or borrowing, a corporation can actually make finding and getting the money you need easier.  If you want to take on investors you simply sell shares of stock.  If you want to borrow, a corporation can add clout when dealing with banks or other lending institutions.

 

Increased Credibility

Let's face it. Most people feel more secure and confident dealing with a corporation as opposed to a sole proprietorship.  Having LLC, Inc., or Corp. after your company's name adds a touch of professionalism and credibility to your business dealings.

 

As always, be sure to consult with your attorney or business advisor before undertaking any important legal or financial decision.

What is the difference among the types of corporate formations, and what is best for me?

Every Situation is unique and requires in-depth analysis. However, below is a comparison chart of the most common corporate entities.