Many small business owners launch their companies as sole proprietorship in which they and their businesses are essentially the same. However, changing the format of a small business to a corporation or a Limited Liability Company (LLC) can offer a range of advantages for entrepreneurs. Most notable is that a corporation or LLC protects entrepreneurs’ personal assets in case debts or legal judgments are claimed against the business.
The advantages of incorporating a small business include:
No. 1: 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.
No. 2: 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.
No. 3: Perpetual existence. Corporations and LLCs can continue to exist even if ownership or management changes. Sole proprietorship and partnerships just end if an owner dies or leaves the business.
No. 4: Tax flexibility. A 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 a LLC and get reported on the personal income tax returns of owners, a 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.
No. 5: Deductible expenses. Both corporations and LLCs may deduct normal business expenses, including salaries, before they allocate income to owners.
Should My Business Incorporate or Form a LLC?
I am often asked this question. It is important to consider the following:
1. 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.
2. Incorporating or forming a LLC allows you to conduct your business without worrying that you might lose your home, car, or personal savings because of a business liability.