Selecting the right type of company for your new business helps maximize your chances of financial and operational success. To get the most out of your small business, it is important to choose the right structure.
It is important to consider the following:
Corporations and LLCs are both separate legal entities (business structures) that enjoy certain protections under the law and important benefits. Most people form a legal business structure to safeguard their personal assets.
Incorporating or forming an LLC allows you to conduct your business without worrying that you might lose your home, car, or personal savings because of a business liability.
The advantages of incorporating a small business include:
Personal asset protection. Both corporations and LLCs allow owners to separate and protect their personal assets. In a properly structured and managed corporation or LLC, owners should have limited liability for business debts and obligations. Corporations generally have more corporate formalities than an LLC that must be observed to obtain personal asset protection.
Additional credibility and name protection. Adding “Inc.” or “LLC” after your business name can add instant legitimacy and authority.Consumers, vendors, and partners frequently prefer to do business with an incorporated company. In most states, other businesses may not form an entity or use a trade name that is the same as your corporate name. This benefits the business legally and helps in brand-building and marketing.
Perpetual existence. Corporations and LLCs can continue to exist even if ownership or management changes. Sole proprietorships and partnerships just end if an owner dies or leaves the business.
Tax flexibility. An LLC is taxed at the same rate as a sole proprietorship while providing limited exposure to personal liability. Though profit and loss typically pass through an LLC and get reported on the personal income tax returns of owners, an LLC can also elect to be taxed as a corporation. When an entrepreneur sets up a corporation, he or she is taxed on both the individual and corporate levels. However, a corporation can avoid double taxation of corporate profits and dividends by electing Subchapter S tax status.
Deductible expenses. Both corporations and LLCs may deduct normal business expenses, including salaries, before they allocate income to owners.
The choices you make in these beginning stages will have an impact on your business liability, fund-ability as well as what types of taxes would be due to county, state, or federal organizations.
Starting a small business requires determination, motivation, and know-how. Choosing what kind of business you want to start can be an immobilizing task when confronted with the multitude of opportunities. It’s important to determine where your passions lie and to understand your personality type, your qualifications and areas of expertise. Equally important is what skills you bring to the table and whether you are entering a dying industry or a fast growing and emerging business.
Excerpts from:
Five Reasons Why a Small Business Should Incorporate
by E.J. Dealy, CEO of The Company Corporation