Should You Incorporate?

Why incorporate? There is a slew of reasons, including asset protection and tax benefits. Let’s look at each more closely:

  1. It’s easier to raise capital. Incorporating your business will make it easier to raise money because it adds a sense of legitimacy to your business. There are some lenders who will only work with corporations and limited liability companies. Most will ask for business-specific financials, and it’s easier to provide these when there’s a clear line of separation between you and the company.
  2. You’ll be able to issue stock options. You can offer investors the opportunity to purchase equity in your corporation. As you grow, you can give key employees the benefit of any increase in the value of your company.
  3. You’ll be protecting your personal assets. You’ll be protected from personal liability for business debts and lawsuits. Legal claimants and creditors can only recover payment from your business property — they can’t come after your home, personal vehicle or personal bank accounts.
    1. If your business fails or goes into debt, your personal property is off-limits to collection agencies.
    2. However, if you sign a personal guarantee on a loan, then your personal assets are open to exposure even if you’ve incorporated.
  4. It will provide advantages if you ever decide to sell your business. Being incorporated will help by giving you the greatest amount of leverage while negotiating an offer. Incorporated businesses can remain intact after your departure from the firm.
  5. You may save on taxes. There are a lot of tax benefits that corporations have access to. You’ll be able to write off salaries, bonuses and payroll taxes and also deduct 100% of your health insurance premiums and fringe benefits.
  6. Opening a business bank account or credit card is easier as a corporation; sole proprietors might have to provide more personal financial info to qualify.
  7. There are also intangible reasons to incorporate. Customers, vendors and partners give more respect to a business with an Inc. or an LLC at the end of the name.
    1. Your business will appear more professional when it exists independent of you.
    2. This may help with brand boosting and expansion efforts.

Sometimes, a sole proprietor doesn’t want the effort or cost of incorporating until it’s clear that the business is viable. Sometimes, proprietors don’t think the business is risky enough to need protection.

But liability is a funny thing; you will want to learn how to protect yourself from the risks faced by your business. You should also think about flexibility: There are greater opportunities to distribute profits among owners in a limited liability company, for example. But if you’re incorporated, in the event of a company lawsuit or bankruptcy, your personal assets will not be at risk.

And the savings in taxes can be substantial if your firm is realizing large profits. As for when to incorporate, timing is key here, too. If it’s very close to the end of the year, you may want to wait until the first of January, so you won’t have to file two tax returns, one for each type of business, incurring additional tax preparation costs.

Though incorporation requires more paperwork and expense than does a sole proprietorship, it grants easier access to capital, enhances your business’s credibility and protects your personal assets from lawsuits. Incorporation is not just reserved for those who are well established.

You can count on Ericson, Scalise & Mangan, PC to provide you with sound guidance and experience in these uncertain times. For assistance with your legal needs, please contact us today at (860) 229-0369, or email us at info@esmlaw.com.