Don’t Procrastinate When Incorporating Your Small Business
Choosing the right business format is an important part of starting a new company. There are numerous benefits, including certain tax advantages, as well as conveying the impression that your startup is a “real” business.
While many entrepreneurs recognize the advantages of incorporating, they procrastinate. A common reason is because they think their company is too small to incorporate.
This could not be farther from the truth.
Incorporating a company helps the entrepreneur to separate business and personal assets. Having that wall protects an individual’s private property from suits by claimants who go might take legal action against his or her company. No business is too small to incorporate. In fact, one could argue that is even more important for the owner of a small company to incorporate because the business entity does not have “deep pockets” if someone decides to sue.
Sometimes people put off incorporation because they don’t really understand the differences between different types of business structures.
Countless companies start as sole proprietorships, often as side businesses run out of a home office or a garage. Sole Proprietorships have unlimited personal liability for business debts and obligations, do not have company name protection that registration as an LLC or corporation with a state entity can provide, cannot issue stock and may have a challenging time in securing capital, and sometimes pay higher tax rates than LLCs or corporations. Naturally, sole proprietorships come to an end with the passing of the owner.
Limited Liability Company
The limited liability company (LLC) is the most popular entity type for small businesses. An LLC combines the personal liability protections of a corporation with the tax flexibility of a partnership. This format offers many advantages, including:
· Pass-through taxation
· Enhanced credibility
· Legal protection of assets
· Less paperwork than a corporation
· Existence in perpetuity
The C corporation is the most common type of corporation in the U.S. and has a number of advantages:
· Owners’ personal assets are separate from the company’s liabilities
· Unlimited issuance of common stock
· Certain tax advantages, including reduced likelihood of an IRS audit, when compared to a sole proprietorship
· Existence in perpetuity
By meeting certain requirements when incorporating a small business or start up, you can elect to claim a S corporation status with the IRS. An S corporation status allows your company to “pass through” its taxable income or losses to the business owners and investors, eliminating “double taxation” on shareholder dividends and corporate income. S corporation status also offers:
· Limited liability
· Investment opportunities
· Continuous existence
The chart below may help decide which business structure to consider:
Incorporating a business takes time, but that should not discourage entrepreneurs from pursuing the option. Anything worth doing is worth waiting, and the advantages of incorporation outweigh the disadvantages.
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About E.J. Dealy
E.J. Dealy is CEO of The Company Corporation, the Small Business Unit at Corporation Service Company® (CSC®), which incorporates tens of thousands of new businesses annually and provides ongoing compliance services to 200,000 companies located throughout the U.S. Dealy previously served as CSC's vice president for corporate development. Before joining CSC, Dealy was president and…