When you first set up a business, you don’t need to think about your legal scheme too much, particularly if you’re the only member of the corporation.
Still, you may have to convert the sole ownership of your business to a corporation or something called an LLC.
As more people enter the company, running it can become a challenging task. Even so, converting a small company to a corporation or an LLC will provide a number of benefits to entrepreneurs.
Read on to help you determine whether or not to incorporate. It is essential to consider the benefits of a corporate or LLC arrangement.
Three forms of corporations for small businesses
For small companies, there are several corporate entities to choose from, including an S-Corp, a C-Corp, and an LLC.
1. S-corp
This is the kind of company preferred by many small business owners. Using this arrangement can help to reduce the higher income and self-employment taxes that independent company owners must pay.
The owners of an S-Corp pay taxes on their company’s profits rather than paying additional corporate taxes on the individual’s net income.
Many people believe that an S-Corp is a reasonable choice for companies that want to expand by bringing in additional investors or going public.
2. C-corp
The financial benefits of becoming a C-Corp are substantial. Business owners can deduct 100% of payroll health care premiums as well as other deduction incentives.
The corporate tax rates for a C-corp are also smaller compared to the private tax rates for LLC owners or sole ownership.
3. LLC
Since it has minimal legal mechanisms and many of the similar advantages as an S-Corp, the LLC is probably the most popular form for small companies.
In practice, LLCs don’t actually save much in taxes compared to sole ownership. This is due to the fact that, similar to sole ownership, the company owner is taxed on the whole net income.
Why you should incorporate your small business
Although incorporation involves more paperwork and cost than a sole proprietorship, it has valuable legal and tax benefits.
1. Personal asset separation and protection
A corporation, as a separate legal entity, is accountable for its own obligations. This ensures that creditors of a company can only demand compensation from the corporation’s properties, not from the personal assets of the stakeholders.
In essence, this implies that business owners can perform their operations without compromising their houses, vehicles, investments, or other private possessions.
In contrast, owners of a sole proprietorship or corporation face limitless responsibility for both company and personal properties.
Moreover, creating a corporation may help if you are worried that your company liability insurance will not cover your personal assets from complaints.
2. Improved credibility
The advantages of incorporating extend beyond financial considerations.
Incorporating your organization as an LLC or other business model will increase its credibility since it shows your clients and the general public that you are committed to what you do.
Customers and vendors would rather put their trust and money in a reputable corporation than an individual. Having an “Inc.” after your company’s name will surely add credibility to your new business.
However, you’ll need to consult with your local authority to see if the name you want is available, and then sign up your company’s name immediately.
3. Tax flexibility
While you should consult with your tax advisor before incorporating your company, it would then help lower your tax bill. It depends on a variety of factors, such as the owner’s income tax rate.
But even so, by adopting the S-Corp tax status, a company can escape double taxation on corporate income and dividends.
4. Deductible expenses
When you incorporate your company, you will be able to deduct usual business expenses, such as wages, before allocating profits to shareholders.
5. Easy access to funding
A corporation’s ability to sell shares of stock makes it more possible to raise money. This could make it so much easier for your company to grow and expand.
Another justification to add is if you are looking for a loan from a bank. Banks may tend to lend money to corporations rather than individual-owned business entities in most situations.
If you are unable to obtain business funding at a crucial moment, your development plans can be disrupted.
6. Perpetual existence
If you are a sole owner and shut your business or die of old age, your company will also stop existing.
Corporations and LLCs will remain even though the ownership or the management team of the company changes.
If you want to transfer the company on to your offspring or a relative, forming a corporation could be the best option.
Final thoughts
While a sole proprietorship is the simplest business structure to establish since no papers are required, it exposes you to potential litigation and other financial obligations. Incorporating your company is, therefore, a good idea for this purpose alone.
Besides, a corporation will provide its shareholders with anonymity. If you want to start a small business but don’t want your presence to be known to the public, incorporating might be your right approach.
After all, the procedure for incorporating your company varies from state to state. You can seek legal assistance from a business lawyer. Forming an S-Corp or a C-Corp is generally more complicated than forming an LLC, so maybe you should ask for professional help.
