Advantages of Incorporation: Top 5 Reasons Why You Should Incorporate

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Incorporating your business is one of the smartest business decisions you can make for your business if you haven't done so yet.

Incorporating immediately sets you up for success.

Making your business a Limited Liability Company (LLC) or a Corporation offers numerous benefits.

Here are five top 5 advantages of incorporation...

 

What is Incorporation? 

Incorporation is the process of setting up a business entity -- either as an LLC or as a Corporation.

Incorporation is in essence a legal as well as a strategic business process.

When you incorporate your business, you make it a separate legal entity. What this means is that you and your business are separate entities with different rights and obligation.

Making your business a separate legal entity should be one of your primary goals. 

 

What Are the Types of Incorporation?

You can either incorporate your business as an LLC or a Corporation.

Your choice of business structure largely depends on the vision, goals, and strategy you have for your business.

There are a number of different entity types and many factors to consider when determining the right business structure.

The decision to choosing the correct business structure is important because the type of business you create determines the type of applications and forms you will need to file.

There’s also very important personal liability and tax implications for each business type.

A business lawyer can help you choose the right entity by raising all the necessary considerations, and also by relieving the burden of organizing, drafting, and filing the proper documentation with state authorities.

 

What's the Difference Between LLC and Corporation?

An LLC is a business whose whose owners have limited personal liability for the liabilities or obligations of the LLC.

Just like the name states, LLCs provide their owners and investors with limited liability for company debts. This means that your personal assets remain untouchable to cover business debts, claims or lawsuits to a greater extent than what you invested in the company.

This makes LLCs a more attractive investment because if the business falls through or has a low profit period, the investors possessions, such as a car or home, cannot be touched by creditors such as lenders or landlords.

You can avoid double taxation. Double taxation means that the corporation and the investor's business profits experience taxation. In an LLC, the initial profits are not considered income and therefore you are not required to pay self-employment taxes on them.

On the other hand...

 

Corporation is also an independent legal entity, separate from the people who own, control, and manage it.

Corporations can enter into contracts, incur debts, and pay taxes apart from its owners. In other words, the Corporation itself, not the shareholders who own it, is held legally liability for the actions and debs the business incurs.

However, corporations are more complex than other business structures because they tend to have costly administrative fees and complex tax and legal requirements.

Because of these issues, corporations are generally suggested for established, larger companies with multiple employees.

It is always advisable to discuss your business goal, vision, and strategy with a business lawyer like myself so I can help you choose the right type of incorporation.

Even when you settled for an LLC, you still have to decide which legal identity best fits your business. A good lawyer will help you make these decisions.

At Mollaei Law, I'm equipped to assist you in choosing the right option. Contact me here.

While every form of incorporation offers unique benefits, there are certain critical benefits incorporation as whole offers.

Here are 5 top advantages of incorporation...

 

1. Incorporation Protects Personal Assets

While we might not want to think about it, anything can go wrong in a business.

Your business might under-perform, it might fail to pick up, or unforeseen risky event might occur.

Generally, the list of the bad things that might happen to your business is endless. Yes, I know, entrepreneurs are the most optimistic people in the world.

But ask any long term successful entrepreneur, they will tell you that they had to overcome humongous challenges before succeeding. 

One of the reasons they were able to overcome such challenges is because they had covered their bases. They had protected themselves. Incorporating your business is one of the ways you can protect yourself. Recovering from your losses is likely to be much easier if the loss did not affect your personal asset. 

Both Corporations and LLCs offer you an opportunity to protect your personal asset. With the right legal advice, you can properly structure you business to enjoy limited liability status.

What this means is that your rights and obligation would be different from that of your business. Business debtors therefore cannot claim your personal property in case the business is unable to pay them. 

 

2. Incorporation Offers Tax Benefits

Minimizing your expenses will enhance the odds of your business being successful, as well as magnify your profits, in case your business is already profitable.

Reducing your tax liability, or generally cost, is one of the most effective ways of reducing your business expenses.

Fortunately, incorporating your business offers you an opportunity to enjoy tax benefits that may greatly reduce your tax costs.

Tax expense deduction is definitely one of largest benefit of incorporation. Incorporation allows business to deduct fringe benefits, namely travel, medical, or any other daily business expenses.

Numerous savings can be made by deducting medical insurance that you pay for yourself or your employees. Medical premiums are 100% deductible for incorporated businesses. 

In addition, incorporating your business is likely to reduce your tax expenses. As a rule of thumb, self-employed a charged are higher income tax than incorporated business.

Therefore, whether you’re small business owner, home worker, or a self-employed person, you should consider incorporating your business as this would increase your disposable income. 

In addition, incorporation offers social security tax deductions that are beneficial to a self-employed person. Every income earned by a self-employed person is viewed as a personal income or salary.

In addition to paying income taxes, the self-employed person also pays social security taxes. Incorporation will enable you pay social security taxes only on the portion of the income you assign yourself as salary. 

Spreading or deducting your losses is another important tax benefit of incorporating. Spreading losses involves carrying forward the business losses thus reducing the tax expense for the years the losses are spread.

If for instance a business incurs a loss of $50,000, it can spread the loss to a period of three years. The tax expense will be lower during the period the loss is spread, even if the business makes profit. 

You can also deduct losses from your income by writing off inventory and/or item sold at partial or full loss. Deducting your losses is a wonderful way of staying afloat during those days your business is struggling or not making enough profit.

New business owners should particularly consider exploring this option since business usually struggle during their first few years. 

In addition to deducting your losses and fringe benefits, incorporation may allow you to deduct certain expenses that you’re already incurring on a daily basis.

A good example is your vehicle expenses. Your might be already driving, to work, to meet clients, or even to drop items to your customers.

While you might view these expenses as personal, they do actually qualify for a full or partial deduction since you incurred them in the normal process of running your business. 

 

3. Incorporation Adds Credibility to your Business

Credibility can be the difference between success and failure of a business. Customers, suppliers, shareholders, and even potential partners will quickly work with a business that they consider credible.

Incorporating your business is the surest way of adding credibility to your business.

It has been proven that business stakeholders prefer to work with business that have names ending with LLC or Inc.

In addition, many states prohibit other business from using an already incorporated name.

Therefore incorporating your business not only adds credibility to your business, but also protects it. Imagine a situation whereby your business share a name with another unscrupulous business. The credibility of your business can be damaged beyond recovery.

Adding an LLC to your business enhances and protects the credibility of your business beyond the city or county you operate. Partnership and sole-proprietorship are in most cases registered at county or city level.

Other business located in a different city or county can therefore legally use your name. Incorporation will ensure you do not share a name with another business in your state. In addition, it will allow you to expand smoothly in other cities in your state. You will be able

 

4. Incorporation Offers Succession and Perpetual Existence

It is not possible for us to operate our business forever. At one point, we might want to transfer our business to another person. If you care about maintaining and protecting your legacy, then incorporation is the right route for you.

If you care about easily transferring your business from one owner to another, then again incorporation is the right path for you. 

For one reason or another, business owner might find his or herself leaving the business. You might find yourself either selling or transferring your business to a friend or family member.

The process of transferring your interest may actually be complicated if your business is currently in unincorporated partnership form.

The partner who wishes to transfer his or her interest would require the consent of all partners. This can be a great inconvenience. As if the inconvenience is not enough, if the other partners are not willing to offer their consent, the partnership will have to be dissolved. 

Generally, a partnership is dissolved automatically if one of the partners in unincorporated partnership decides to leave the partnership without the consent of the other partners.

The situation is not any better in an unincorporated sole proprietorship. Sole proprietorship is automatically terminated if the owner dies or is no longer interested in running the business.

Incorporation fortunately eliminated this transferability restriction thus enabling your business to enjoy perpetual existence. However, the law understands that transferability restriction might be appropriate to some business and/or business owners.

It therefore does not make it a mandatory requirement for every incorporated business. 

Business owners have option of deciding whether to adopt the transferability benefits as whole or placing restriction on it. The best approach would be to adopt it but put various restrictions on it. However, you can always talk to us so that we can discuss specific detail that best suits your business.  

 

5. Incorporation Allows You to Get Funds For Your Business

Getting funding is one of the most daunting tasks faced by entrepreneurs.

Financiers will scrutinize your business to make sure everything is in odder. As pointed out earlier, incorporation increases the credibility of your business.

Financiers therefore are likely to give an incorporated business the first priority. When funding such a business, financiers will be at least sure that their money will be used for business and not personal purposes.

You can easily convince them that the separate legal entity nature acquired through incorporation will serve to protect their funds from any forms of misuse. I

n addition, an incorporated business is expected to have a separate bank account that investors can fund. Otherwise it is very unlikely for investors to write chek in your name. 

Serious investors usually prefer incorporated business. Incorporated business offers them different ways of funding a business.

For instance, venture capitalist and angel investors can fund a business through purchasing the shares of the business. In fact selling your business shares is one of the best ways of acquiring funding.

It allows you to receive funding while maintaining the control of your business. Nonetheless, you need to be careful not to lose the controlling stake of your business.

Selling shares of corporation or LLC is less complicated than selling shares of a partnership or a sole proprietorship.

Collateral or security is also another aspect business owners should consider while seeking funding, especially when they are seeking funding inform of cash rather than sale of shares.

When relying on cash financing and you’re required to offer a collateral, the limited liability clause in corporation and LLC will protect you especially when you’re unable to meet your obligation. 

Unlike in partnership or sole proprietorship, you will not signing any contract in your name. You will sign in your business name implying that you do not rely on your asset or personal line of credit. Incorporation allows your business to acquire a credit line that is separate from your personal credit line. 

 

Conclusion

Sam Mollaei, Esq., Business Lawyer

Sam Mollaei, Esq., Business Lawyer

Every business should be incorporated if you're serious about your business. The benefits of incorporation far outweighs any potential cons.

Limited liability aspect of incorporation will protect your personal asset. Adding an LLC or INC to your business will add credibility to your organization.

Incorporation will also protect your brand from being abuse by your competitors.

The tax benefits enjoy after incorporation can significantly reduce your business expenses. And finally incorporation will increase your chances of receiving financing from different sources.

Mollaei Law is a law firm specializing in business law serving businesses and entrepreneurs. We provide legal expertise in all stages of business development by drafting and reviewing contracts and agreements, assisting transactions and negotiating, forming LLC's and Corporations, registering trademarks and copyrights, business planning, and answering any legal questions you may have about your business.

Sam Mollaei, Esq., business lawyer, can be reached by email sam@mollaeilaw.com or via phone (818) 925-0002