Guest post by Nellie Akalp, CEO of CorpNet.com, an incorporation filing service company. Nellie is a strong advocate in educating small business owners and entrepreneurs about the importance of protecting their assets and is responsible for overseeing and managing the daily operations of the business. She blogs regularly at Mashable and Tweets from @CorpNetNellie.
If you think your business is ‘too small’ to be incorporated, think again. There are many benefits to incorporating a business – most importantly, it protects you and your personal assets. Whether you’re a freelance writer or cabinet maker, incorporating or forming a limited liability company (LLC) can be a smart move. After working with small businesses across various industries, I’ve assembled the key things you should know when it comes to incorporating your business.
The benefits of incorporating your business:
- Liability protection: First and foremost, the LLC and the Corporation (C Corporation or S Corporation) protect the owner’s personal assets from any liability of the company. That is, if your company happens to be sued, your personal assets (property, savings accounts) are shielded from any judgment. Of course, lawsuits are worst-case scenarios and there’s a slim chance you’ll ever run into legal problems. However, if you’re sued as a sole proprietor, you’ll be sued personally. And that means everything - from your children’s college fund to your retirement savings – is at risk. Also keep in mind that creditor judgments can last up to 22 years, so you need to worry about protecting the assets you have today as well as tomorrow.
- Taxes: Federal income tax rates can be lower for corporations than for individuals. And as a corporation, you may be entitled to additional deductions.
- Business credit/capital: As a corporation or LLC, it can be easier for you to access a line of business credit. Forming a C Corporation will be essential if you plan to seek Venture Capital funding.
- Credibility: Adding LLC or Inc. after your company name boosts your credibility in the eyes of some customers and partners.
There’s more to incorporating a business as you have the option to choose, the three most common legal business entities in the U.S. are the LLC, S Corporation, and C Corporation.
- The LLC is great for a business that wants liability protection, but seeks minimal formality. It's also the perfect structure for a business with foreign owners since anyone (C Corp, S Corp, another LLC, a trust, or an estate) can be an owner of an LLC.
- S Corporation: The S Corporation is a pass-through entity for federal taxes (like the LLC). It’s great for a small business owner who can qualify: The IRS places limits on the number of owners and who can be an owner in an S Corporation. Plus, all owners are taxed based on their percentage of ownership.
- C Corporation: This entity is not recommended for small business owners. The C Corp is ideal for a business that intends to raise capital by issuing stock or attracting investors through VC funding.
Over the years, the incorporation process has been greatly simplified, so forming a corporation or LLC can be painless and affordable (even for the time-pressed, limited budget, small business owner). Take some time upfront to learn about the different business structures and determine which would be best for your business. After all, both you and your business are worth it.
If your business isn't incorporated, why not? Don’t hesitate to post any questions or comments below about the process of incorporating a business.
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