Why Incorporate or Form an LLC
Deciding what structure to organize your business is one of the most important decisions a business owner can make. Even though a business can change the structure as they see fit, getting it right the first time will make things less complicated. Contrary to what most people think, forming a Corporation or LLC is not the only option for starting a business. In fact, it could be unnecessary and more expensive depending on the circumstances. Before deciding to incorporate, it is necessary to understand the benefits and formalities associate with this business structure.
What is a corporation?
The definition of a corporation is, “An organization formed with the state government approval to act as an artificial person to carry on business, which can sue or be sued, and can issue shares of stock to raise funds which to start a business or increase its capital.” One benefit is that a corporations liability for damages is limited to it assets. Shareholders, officers, and directors are protected from personal claims.
When two people get married they become one. That is very much the case when forming a corporation only it can be 2 or 100 people forming a single corporation. Once formed the corporation becomes a separate legal entity from the shareholder (Owners). The corporation will continue to exist perpetually regardless of what happens to the officers, directors, shareholder or employees. In order to close a corporation, the directors and shareholders must file Articles of Dissolution to legally close the company. With a Partnership or Sole Proprietor business structure, the business is not separate and independent from the owner/owners. Owner/Owners can be held personally liable for a business debt and a business may be liable for an individual debt regardless if the debt is related to the business. Incorporating a business creates a barrier of protection for the business from the owner’s personal financial circumstance and situation.
Limited Liability Protection
One of the most important benefits of forming a corporation is the limited liability protection afforded shareholders, officers and directors. Any debt or liability of an officer, director or shareholder is completely separate from the corporation. The same goes for the company, officers, director and shareholder are not personally liable for debts and liabilities of the corporation, unless there is fraud. Liability of shareholders is limited to their investment, nothing more. This is the main reason business owners choose to from a corporation. Owners of a sole proprietorship or partnership are held infinitely liable for any debt and liability of the business. If a business is not able to adequately satisfy a debt, a creditor can go after an owner or partner until the debt is satisfied. In a Corporation, a creditor can only go after the assets of the company to satisfy the debt, thus shielding the shareholders involved from personally satisfying the debt. Again, they can only lose what they invested. Since shareholders understand their liability protection and know they can only lose what they invested, the business can make decisions knowing that shareholders won’t be impacted and liable for more than they invested.
Since a corporation is a separate legal entity from its shareholders, the corporation needs to file a yearly tax return. The corporation’s taxable income will be taxed at the corporate tax rate. Any income leftover after taxes can be distributed to the shareholder. The income provided to the shareholders is then taxed based on their personal income tax bracket. This is what is known as “double taxation” the business is taxed at the corporate level and then dividends (profits) given to shareholder (owners) are taxed at the individual level. With a sole proprietorship or partnership, since the owners are the business, the taxable income passes to the owners or partners and are taxed based on the individual’s income tax bracket. Double taxation has long been a deterrent to small business owners forming a corporation. Business owners looking to avoid double taxation of a corporation have options. This includes filing as an S-Corporation or as a Limited Liability Company (LLC). With these structures the taxable income of the business flow through directly to the shareholder or members. This is known as “pass through” taxation. The taxable income will pass through the business to the shareholders/member and be taxed based on the individual’s income tax rate avoiding double taxation while still offering limited liability and benefits to incorporate.
The ability to easily transfer ownership interest from one person to another is one of the many reasons investors and owners like the corporation business structure. Unlike a partnership, incorporating allows shareholders/owners to transfer their business interest without the approval or consent of the other shareholders. It is not uncommon for smaller corporation to put limitation on this and have rules regarding shareholders transferring there business interest. If no rules are created regarding the transference of shares then shareholders by default may transfer their business interest as they please. With a partnership, express consent is generally required in order for a partner to transfer their interest in the business. If you choose to incorporate the business, there is flexibility to decide whether there should or should not be restrictions on transferring business interest.
Creditable Business Structure
Having “Inc. or LLC” at the end of a business name tends to give customers more confidence in the services or products that the business is offering. Customers, vendors and partners understand the formalities and benefits to incorporate and figure if a business has gone though all these steps they are more legitimate then a sole proprietor. It is important to note that using these terms at the end of the business name means that the appropriate paperwork has been filed with the state and the state has approved the filing allowing the business to use corporate indicators. If a business decides that incorporating is the right business structure
DoMyLLC is here to help streamline the process. Lawyers typically charge $750-$1500 to file a corporation. Using DoMyLLC to file your business, will help save money that can be put towards other necessary business needs. Don’t get nickel and dimed, let us DO IT!
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