So you’ve made the decision to open a business, and your roadmap to success is meticulously detailed in your business plan with a developed, clear sense of your brand. Now what are your next steps? Out of a variety of business decisions you will have to make, deciding the structure of your business entity is one of the more critical ones. Should you remain a sole proprietor where your business and personal assets are co-mingled, or should you incorporate? The answer to this question is a core one and will contribute to the success of your business.
Regardless of the business’ size and services, issues that influence this decision include protecting your personal and business assets, establishing the reputation and credibility of your business entity, and understanding the tax implications of different forms of incorporation. Let’s look at some of these issues.
One important advantage to incorporating your small business is asset protection. If you incorporate your small business, your personal and business assets are separate. If you remain a sole proprietor, those assets are connected. Incorporation protects your personal assets as well as those of any shareholder, director, and officer of your company from liability. In the event there is litigation, a lien against your business, bankruptcy, or other legal action, you’ve protected your personal assets because of an incorporation decision. Generally your personal assets such as property and financial holdings (e.g. bank accounts) cannot be touched or taken.
Through incorporation, you are establishing a business that is at arm’s length from you as an owner, and you can conduct your business as a business. Depending on the type of corporate structure you elect, there will be differing tax, regulatory, and compliance requirements.
Incorporating demonstrates the credibility of your business entity to potential investors, business partners, vendors, and your existing and prospective clients. Your incorporation decision bestows your business with certain rewards and attractiveness. For instance, the government permits certain corporate structures to issue stock, which in turn can attract potential investors and provide you with the opportunity to raise capital. Your business will be a credible business entity to financial institutions, grant funders, and others, opening up the possibility to obtain business loans, lines of credit, and grants to assist you to achieve business success.
Naming your business is a major part of your brand, and protecting that name will ensure you stand alone in your marketplace, gaining a competitive advantage. Through incorporation, you gain this protection in your state. No other business can infringe on your brand or use your business name. Choosing the right name for your business plays a major role in creating your brand and your marketing efforts.
Incorporating your business also establishes perpetuity. Unlike a sole proprietor or a partnership, an incorporated business can survive changes in ownership and/or management. So your business will exist until there is a decision to dissolve and close the business. For example, if one of the business owners dies, the business entity will still exist while only the management will have changed.
Sole Proprietors are not afforded certain tax benefits. Whether you form your business as a Limited Liability Company or as a Corporation, there are tax benefits for both, and the government permits additional business deductions for an LLC or Inc. However, you will need to consult with a tax accountant to understand fully tax implications and tax compliance.
LLC or Inc.?
You’ve determined that incorporating your business is the best. Now you must decide on the type. To assist you to determine this, here is a brief summary of the characteristics of each type of business entity.
Limited Liability Company
The simplest form of incorporation is establishing your business as an LLC. The gives your business corporate protection with the tax benefits of a sole proprietorship or partnership of two or more individuals. You create an LLC by filing Articles of Organization or a Certificate of Formation with the Secretary of State in your state and pay the appropriate fees. Under this type of organizational incorporation, the owners of the LLC are called members. If there is more than one member, a managing member must be appointed. Additionally, there must be an operating agreement between the member(s) and the company manager that outlines the management of your company, ownership of the company, and any other operating principles as deemed necessary. So you are not required to hold annual meetings as an LLC.
A more formal type of incorporation involved is the creation of a corporation. For this type of legal entity, you would file Articles of Incorporation with the state, as you would for an LLC. Corporate ownership in this case rests with the shareholders who hold shares of stock in the corporation. Each corporation has a governing board of directors with officers empowered to manage the company and make critical business decisions.
The government allows corporations to choose how they will be taxed. A corporation that elects to be taxed as a corporation is referred to as a “C Corp.” Alternatively, an “S-Corp” is a corporation that elects for the taxable income and losses to be taxed on its shareholders’ returns, which requires the filing of additional paperwork with the IRS.
You or your legal counsel must develop bylaws and maintain minutes of all board meetings. There must be annual meetings whereby a board member, or designee, documents the proceedings of the meeting in formal minutes. This is to protect the corporation and establish corporate transparency. If the business owners do not perform these actions, the corporation’s tax status and protection is at risk, meaning you could lose your business and your personal assets.
Now that you have a basic understanding of all the types of the business entities available to you, you can now make an informed decision. To obtain more information and additional guidance about state-specific incorporation in your state, visit your Secretary of State on the web.
Congratulations on taking the next step in creating your business and developing your brand to ensure the future success of your business!
By: Chantal Towles, President of Creative Business Assistants, LLC, provides dynamic, customer-focused, small business incorporation services, as well as compliance and virtual business support services. To learn more about Creative Business Assistants visit www.cbadirect.com or view Chantal’s profile on LinkedIn.