It is a universal fact that persistent hard work and some timely luck is needed to be successful in any business venture. However, when it comes to forming a corporate entity for your business, a little homework is all that is required to help make an informed decision which could lead to the continued success of your business.
While it is correct for business owners to give premeditated thought as to their venture’s location, customer service, human resources and other management issues, it is equally important that the owner consider the corporate structure of the business as well.
Many business owners don’t consider this, but the corporate structure that is chosen can often times be the difference between the venture’s success or failure, especially in today’s highly competitive and litigious marketplace. Most often, entrepreneurs select the corporation as their preferred entity choice, which encompasses several unique benefits.
Incorporating, while definitely not for everybody, offers several distinct and money-saving advantages over other types of legal entities. Here are eight advantages of incorporation:
- Protection of Personal Assets
If you operate as a sole proprietor or partnership, there is virtually unlimited personal liability for business debts or lawsuits. In other words, should you go out of business or be a defendant in a lawsuit, your personal assets such as homes, jewelry, vehicles, savings, etc. are subject to seizure. This is generally NOT the case of incorporation. When you incorporate you are only responsible for your initial investment in the corporation; as such, this limited liability feature of a corporation, while not a guarantee, is DEFINITELY one of the most attractive reasons of incorporation.
- Transferable Ownership
Corporations are generally much easier to sell and are usually more attractive to buyers than either a sole proprietorship or partnership. The reason for this is because a new buyer will not be personally liable for any wrongful acts committed by the previous owners. For example, if someone buys a sole proprietorship, the new owner can be held personally liable for any mistakes or illegalities on the part of the prior owner…even if the new owner had NOTHING to do with the situation! This is usually NOT the case with a corporation.
When you incorporate a business,there are numerous tax advantages at your disposal that are virtually impossible to accomplish with other business entities. When a business is incorporated, a separate and distinct legal entity is created. Because of this, there are various transactions that can be structured within the corporate parameters of the business that will save big money on taxes. For instance, if you own a building, you can rent office facilities to your corporation and claim depreciation and other deductions for it. Your corporation can then claim the rental expense. You are prohibited from doing this if you are a sole proprietor or a partner in a partnership.
- Privacy and Confidentiality
Incorporating your business is a great way to keep your identity and business affairs private and confidential. If you want to start a business, but would like to remain anonymous, forming a corporation is the best way to accomplish this. Moreover, some states such as Nevada offer even more privacy protection for corporations and their shareholders.
- Easier to Raise Capital
When you’re looking to raise money through investment or borrowing, a corporation can actually make finding and getting the money you need easier. If you want to take on investors, you simply sell shares of stock. If you want to borrow, a corporation can add clout when dealing with banks or other lending institutions.
As mentioned in #3, when you incorporate a business, you create a separate and distinct legal entity. This separate and distinct entity (the corporation) will exist in perpetuity irrespective of what happens to the shareholders, directors, or officers. This is NOT the case with sole proprietorships, partnerships or even limited liability companies. For example, if an owner, partner, or member dies, the business AUTOMATICALLY ends or gets wrapped up in the legal dissolution process. Corporations, on the other hand, exist forever.
- Retirement funds
Retirement funds and qualified retirement plans, such as a 401(k), may be established more easily.
- Credit Rating
Regardless of an owner’s personal credit scores, a corporation can acquire its own credit rating, and build a separate credit history by applying for and using corporate credit.