Among the many decisions you need to make as a new business owner, one is choosing the business structure for your company. You may think simple is better—especially when you’re feeling overwhelmed with all there is to do to launch your business. As someone who has started several businesses, I understand why traveling the least complicated path may look most inviting. But taking the easy way out could put you at a disadvantage.
If you don’t take measures to file to operate your company as a formal legal entity, you will by default operate as a sole proprietorship (or general partnership if more than one owner). This is the most uncomplicated way to run a business, but it shortchanges you from the important advantages you’ll reap if you instead incorporate or form a Limited Liability Company (LLC).
Why is it better to incorporate or form an LLC for your startup?
1. Limit Your Personal Liability.
If anything can make you sleep better at night, it’s the peace of mind your personal assets are protected in the event something goes wrong in your business. A corporation is recognized as a separate legal entity from its owners, therefore business liabilities and debts are the responsibility of your company not you personally. So, in the event someone would bring suit against your business, your personal assets (like your vehicle, home, personal savings account, etc.) will be insulated. As an LLC, you also gain personal liability protection, although it’s less extensive than with a corporation.
2. Boost Your Credibility.
By having “Inc.” or “LLC” added to the end of your business name, customers may see you as more legitimate and trustworthy. This could mean the difference between prospects doing business with you or choosing a competitor.
3. You May Discover Tax Advantages.
As a corporation, you may be eligible for tax deductions not available to sole proprietorships or partnerships.
Some small business owners find the LLC’s “flow through taxation” an appealing option instead. As an LLC, your business’s profits and losses pass through to your personal income tax return. This may be a good fit if you wish to offset your personal income tax liability with business losses.
An attorney/tax professional would be able to assist you in deciding which business structure will benefit you most from a tax perspective.
4. You Can Have Multiple Owners.
Generally, LLCs and corporations (with the exception of S Corporations) don’t limit how many owners/members/shareholders you may have.
5. If It’s a Corporation, Your Business Can Live On.
Because it’s a separate legal entity that exists in its own right, a corporation has the advantage of a perpetual life. The ownership shares of the business can be sold, bequeathed, or otherwise given to others. So, if an owner or shareholder dies or leaves the business, the corporation may continue to exist. A corporation exists until articles of dissolution are filed to close it.
6. If It’s a Corporation, You Have More Funding Capabilities.
As a corporation, your company may sell equity to raise money for your business. This can be a huge advantage if you want to grow and expand your company. C Corporations allow for an unlimited number of shareholders and multiple classes of stock, and S Corporations allow you to have up to 100 shareholders and sell one class of stock.
Starting Your Startup On The Right Foot
With both legal and tax issues affected by your choice of business structure, I recommend making the decision with care. To ensure you choose the structure that’s right for you, educate yourself on the options available and consider seeking guidance from reputable legal and accounting professionals. After you’ve decided on your business structure, you might consider using an online business document filing service so you can keep costs under control. They can put your mind at ease by making certain your forms are completed accurately, and they can save you on some attorney’s fees when filing your business registration paperwork.
The above content should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.