The Benefits of Incorporating a Business
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There are many benefits of incorporating your business and the most important ones include asset protection through limited liability, corporate identity creation, perpetual life of the company, transferability of ownership, an ability to build credit and raise capital, flexibility with the number of business owners, and tax savings. And best of all, because there are no attorneys’ fees when using a third-party like CorpNet, the cost of incorporating is affordable. Let’s further break down each benefit of starting a corporation.
8 Benefits to Starting a Corporation
1. Asset Protection Through Limited Liability
A properly formed corporation is recognized as a Separate Legal Entity with its own Federal Tax Identification Number. The corporation is responsible for its liabilities and its debts, but the owners are not.
Example: Let’s say ABC Corporation has $1,000 in corporate assets (cash and computers). Business is slow and there are 12 months of rent remaining on the lease. If ABC Corporation was properly formed, and if the lease was executed by “ABC Corporation”, the landlord will only be able to reach the $1,000 of assets within the corporation. The shareholders (or owners) of the corporation will most likely n be liable for any payments remaining on the lease.
Here, the corporation served its purpose and provided true asset protection for its shareholders.
A sole proprietor (or partner in a Partnership), by contrast, is personally liable for all business obligations. Therefore, the business owner who did not incorporate or form a Limited Liability Company may lose his/her personal assets to satisfy the debts or judgments including their homes, cars, and personal savings and investments. However, any benefits of incorporating may be lost where the business commits fraud, neglects corporate formalities, or comingles assets.
For true asset protection, and to avoid personal liability, most business owners should incorporate a business. A properly operated C Corporation or LLC limits the liability of its shareholders to the amount they invested in the company.
2. Creation of Corporate Identity
Marketing studies show, adding an “Incorporated” or “LLC” to the end of a business name provides a sense of credibility and trust. One sure-fire way to success in business is to conduct your business legitimately and with honesty.
3. Perpetual Life for the Business
A Corporation is a separate legal entity with an existence of its own and a perpetual life. Therefore, the business may continue far beyond this lifetime and into future generations.
Sole proprietorships end upon the death of the owner. A C Corporation, however, continues indefinitely until it is dissolved. Shares of ownership in a corporation can generally be sold, gifted, or bequeathed to others.
4. Transferability of Ownership
A Sole Proprietorship does not have a life apart from its owner and it may not be transferred to a third party. The corporation, however, provides an excellent vehicle for transferring ownership: Ownership may be transferred by an exchange of assets for stock.
5. Ability to Build Credit and Raise Capital
The ability to raise capital by leveraging the inherent value of a business shouldn’t be underestimated. The historical purpose of a corporation was to form an entity with distributed ownership. In a sense, it is like splitting up the worth of an enterprise into many pieces. Control can be retained by holding on to the majority of shares, while investment capital can be raised by selling other shares.
Investors may be keen to take risks with an offer of partial ownership. Stock then has a real or immediate value as well as a potential value. Many private equity firms will only invest when their money can be backed up by holding stock. This avenue isn’t available to non-corporations.
6. Flexibility With the Number of Owners
C Corporations and LLCs generally allow for an unlimited number of shareholders (except S-Corporations, which have a limit of 100 shareholders).
7. Tax Savings
As a corporation, businesses will pay half of the social security taxes directly from the corporate account instead of paying the entire 15% as self-employment taxes. There are also opportunities to shield income from taxes through a 401k plan (or other retirement mechanisms), a healthcare plan, life insurance, and charitable contributions. While some of these mechanisms have parallels in non-incorporated structures, a corporation has the advantage of structuring benefits through standard organizational plans.
8. No Attorneys Fees
In most states, incorporating a business does not require costly attorney fees. In fact, you can visit the state office and file articles of incorporation yourself. That said, there is no replacement for sound legal advice. If you can afford an attorney and you feel you would like advice on what solution is best for your particular circumstances and the additional benefits of incorporating your business, please contact a licensed attorney in your jurisdiction.
The Basic Steps of Incorporation
Incorporating is a state level activity and the nuances vary by state. While it is important to check with your state’s specific rules and regulations, here are some common incorporation steps:
- Brainstorm and search possible business names to incorporate under. Every corporation has a unique legal name in the state of incorporation. One requirement is to include “Inc.” or “Corp.” in all formal correspondence and advertising – this varies slightly by state.
- Appoint directors of the corporation. These do not have to be shareholders, and the required positions also vary by State and type of corporation. In smaller companies, the directors are usually the owners of the business.
- File Articles of Incorporation with state authorities. Which state a company is incorporated in will determine the actual forms, and some States are ‘corporate friendly’. It helps to research options on which state to incorporate in – for instance, a state with lenient corporate taxation might be a possibility. The fee for incorporation varies by state but averages about $500.
- Draw up corporate bylaws. This will be a legal outline of how the corporation is run. Great care must be taken to cover all the bases in the bylaws – many legal battles can be avoided when the ruling document is clear and addresses common issues.
- Hold the initial meeting of the board of directors. This is a formal meeting with minutes recorded and allows initial votes on the bylaws.
- Get any required licenses or permits to operate in the company’s name.
- Issue stock certificates to corporate shareholders.
- Publish required notifications in local media (usually the legal section of the newspaper).
Does Incorporation Require Professional Help?
No. Individuals and partners incorporate quite regularly without any professional guidance at all. It is similar to filing personal taxes. The process isn’t easy, but it’s doable. Having a professional involved (or getting straightforward advice from a service) helps make sure that all the details get addressed.
This is probably most important for a first-timer or someone converting a Sole Proprietorship to a C Corporation. Sometimes, the process can seem cumbersome and difficult to understand. There is legal terminology to grasp and several hurdles to jump. A main consideration is the corporate calendar and tax cycle – a corporation is treated as a separate entity under tax laws and these forms by themselves can be quite intimidating.
There is nothing to prevent someone from exploring a do-it-yourself approach and then, if necessary, getting professional help. A lawyer or CPA isn’t required, but these are the top-tier professionals in this area. Of course, fees increase dramatically, depending on who is hired and how involved they become in the process. A mid-level solution is to do the work as an individual and then hire a pro to check everything and make suggestions.
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