When starting a business, the first essential decision is to establish the official business structure of your company. Many entrepreneurs choose to launch their business as a Limited Liability Company (LLC) or Corporation rather than stay unincorporated as a sole proprietorship.
Why do business owners prefer to incorporate as an LLC or Corporation?
- Protection. Simply operating a company as a sole proprietorship can be risky business because your personal and business assets are essentially one in the same. However, changing the format of a business to a properly structured corporation or Limited Liability Company (LLC) legally sets boundaries between your personal and business life. The primary reason most people form a legal
business entity is to protect their personal property as a business owner. By incorporating or forming an LLC, you’re free to conduct your business without worrying that you might lose a home, car or personal savings due to a business liability.
- Credibility. Increase the level of trustworthiness and legitimacy that your business has in the eyes of your customers, partners, potential clients, investors and financial institutions. In some situations, businesses require companies to be incorporated before they can compete for contracts or be hired for project work. Operating your business as a corporation or LLC shows that you are reliable and
committed to your investments and partnerships.
- Longevity. You’ve worked hard to develop your business, and you want to make sure that the foundation you’ve built continues even if ownership or management changes. As a sole proprietor, the life of your business is tied to an individual. In a corporation or LLC, the life of your business will extend beyond an owner, principal or partner. Incorporating your business will avoid frustrating legal
entanglements or even termination of the business in the event of retirement, long-term disability or death.
- Tax Benefits. If you are an unincorporated business, you might be missing out on tax breaks. For instance, both corporations and LLCs may deduct normal business expenses, including salaries, before they allocate income to owners. Additional perks that align with property structured companies can
include advantages to medical insurance, retirement plans, and loss deductions.
- Investor Attraction. Incorporating your business makes it easier to grow, develop and transfer your business during the life cycle of your company. Sole Proprietors often run into challenges when they are looking to acquire capital from investors or financial institutions. For instance, banks can be reluctant to lend loans to sole proprietorships, and in turn, they often have to rely on personal financing sources such as savings, home equity or family loans. Operating as a legal entity
demonstrates that you are properly structured to receive funds and protect those that invest in the future of your business. When properly incorporated, a business entity creates a shield, often called a corporate veil, that allows the company to take risks and grow while protecting the personal liability
of the individual investors.
Aha! You’re feeling bright, inspired, and ready to start your business. But where do you start? Download this step-by-step guide to get started.
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