Establishing as a corporate entity and achieving your goals and objectives is a dream of almost all entrepreneurs. However, incorporating a business; whether it’s a corporation or limited liability corporation (LLC) has many advantages such as protecting the business owner’s personal assets and many more.
If you’re not sure whether you should form a business structure for your company, then this article is for you. Read on to learn about the benefits of company incorporation.
Benefits of incorporating a business
Complete protection of your personal assets: Both corporation and LLC help business owners protect their personal assets. As far as the law is concerned, a C corporation is an independent entity which exists and operates separately and independently from its owner(s). A sole proprietor on the other hand wouldn’t enjoy such benefits. For example, if an individual gets a sudden profit or loss, he will be responsible for it. On the other hand, in the case of a corporation, all gains, losses, and debts are distributed in the corporate body, thus protecting the assets of its members.
This is the reason why people prefer incorporating a business when it comes to launching new products or services.
Tax benefits: In several instances, corporate tax rates are lower than individual tax rates. Additionally, corporations and LLCs are eligible for certain tax benefits and rebates, which individual taxpayers aren’t eligible for.
By forming an S-corporation, you can avoid the double taxation system—paying taxes at both the corporate and personal level. Only shareholders are taxed, passing through to each individual’s personal tax return instead. However, there are certain requirements for small businesses to qualify for this business status.
An LLC can also file for S corporation status, thus combining the simplified business structure with tax benefits of an S-corporation.
Additional credibility and protection: When you incorporate, you can add “Inc.” or “LLC” to your business name. This will add legitimacy and authority to it. This also helps you in brand-building and creating effective marketing campaigns. Additionally, consumers, suppliers, and partners prefer doing business with incorporated companies.
Another benefit is that you can stop copycats from using your business assets, such as your brand name for their own profit.
Get motivated employees to work for you: Employees are the building blocks of a company, and without a world-class staff, your business likely won’t be able to compete in the stiff environment that most businesses operate in. With a corporate status, you can attract motivated, trained employees to join your company. Additionally, sole proprietors and independent contractors are usually unable to provide competitive benefits and profit sharing schemes, which corporations offer. As a result, employees prefer working for incorporated businesses rather than joining informal small businesses.
Allows issuing stock options: Many companies compensate third parties by issuing stock options or allowing allowing for equity purchase. This is usually helpful when you have huge financial requirements for various purposes and raising finance from external investors in the only way to do this.
Although it’s possible to make pre-incorporation agreements allowing people to get equity upon incorporation, it’s better to incorporate a business and then design these kinds of deals.
Helps in minimizing misunderstandings and confusions: When a business has multiple founders, chances are more that there will be misunderstandings and confusions over profit sharing and more. Even though this always happens no matter how close the founding members are.
If you incorporate your business and issue stocks to the founders, all confusion related to equity and profit sharing can easily be resolved.
Perpetual existence: A corporation is a legal business structure, which can exist indefinitely no matter whether its owners, members, or directors are in debt in their personal capacity, or cease being involved with the company. In other words, by incorporating a business, you can keep the entity alive in perpetuity.
What’s Right for You – S corp, C corp or LLC?
Every business owner has different needs, and one business structure may not fit the specific needs of the business owner. When deciding which business structure is right for you, you should always consider your objectives and the corporate benefits you would like to take advantage of.
Listed below are three common business structures and their benefits.
- Unlimited growth potential through sales
- No limit to the number of shareholders
- Business expenses are tax deductible
- No double taxation system
- Better investment opportunities
- Annual tax filing
- Simple structure
- Easy to move to other business structures (flexible)
- No residency requirements
How to incorporate a business?
If you have decided to incorporate a company, follow these steps-
Appoint a board of directors– A board of directors is responsible for protecting the shareholders’ investments and appoint the officers of the company and control other operations. You should usually appoint your directors before filing the paperwork.
Assemble the stockholders– Consult with all the stockholders and make sure they agree with all the incorporation decisions.
Decide the type of business structure– Select the business structure- C corp, S corp or LLC.
Contact the secretary of your state office– Get proper guidance related to incorporation and other processes involved with the process. While you can often go through this process yourself, it is often a wiser decision to consult with a business attorney to either walk you through the process of what to do, or even better perform the entire process on your behalf.
Draft and submit your articles of incorporation or organization– This is a document that formally establishes the existence of a corporation or company, as well as outlining the corporate governance and by-laws of the organization. Obtain all relevant documents, complete & submit them, and pay the necessary fee.
File a statement of information form– Visit the secretary of state’s site to get detailed information about filing the statement of information form.
Register your corporation/company with the IRS– File the IRS form to register your corporation with the IRS.
To sum it up—incorporating a business is advantageous to business owners in many ways. There’re several rules and legal obligations for company incorporation, which you should be considered. Speak to a registered agent or other relevant professional for business incorporation services and get all the incorporation processes done right.