As a new business owner, you have several legal options to choose from when you are ready to incorporate. You can go through life as a sole proprietor, or you can incorporate your business. According to the Small Business Administration, “More than two-thirds of all businesses in the United States are corporations, and more than half of all American businesses are either corporations or LLCs.”
Whether you’re considering a sole proprietorship or a corporation, there are several issues you should consider before you make your final decision. The benefits and drawbacks of each are quite different, so it’s important to understand the pros and cons of these business structures.
Most corporate entities consist of three governing bodies:
- Shareholders who essentially are the owners;
- Board of Directors who make decisions for the corporation;
- Officers (CEO, CFO, CTO, etc.) run the day-to-day activities.
Shareholders elect the Board of Directors, who owns the corporation through stock purchases. The board of directors hires the officers that run the day-to-day activities.
Importance of incorporating to protect your assets
If you are considering starting a new business, you need to understand how incorporation affects your ability to protect yourself personally if something goes wrong with the company.
If you are not incorporated, you risk any debt incurred by the company will be considered personal debt. Without the protection of incorporation, creditors can garnish wages, seize property, sue you directly, etc., even though they have no legal right to do so.
Do I need to incorporate my small business?
The answer depends upon whether you are planning to raise capital from investors, sell products or services, hire employees, or engage in any activity that requires legal protections beyond those offered by sole-proprietorship. If so, then it is time to consider incorporation.
Types of Business Structures
There is no reason to form a corporation unless you plan to take advantage of some of the benefits listed above; you have a few options when incorporating a new business.
A sole proprietor must have full ownership of the company. A sole proprietorship has no employees. If you choose to go this route, you are responsible for all taxes and operating costs but have no protection against lawsuits relating to your business.
Limited Liability Company – LLC
A Limited Liability Company is an entity that is legally separate from its owners. This means that if someone sues you, they cannot sue the company itself because no assets are belonging to the company. Instead, any money awarded goes directly into your pocket. The only way to get at the company’s funds would be through personal bankruptcy proceedings against yourself. If this happens, then all debts owed by the company will also become yours. The main advantage of forming an LLC is the protection from lawsuits.
An S-Corporation is taxed at your tax rate, but you are allowed to pass through certain losses from the company directly to yourself as an individual. This means that if you make $100,000 per year, you’ll owe taxes on all of this money, plus any net loss passed through by the corporation will reduce what you owe.
C corporations are so popular that there are currently more than 4 million registered companies worldwide. This means that even though you might not want to incorporate outside of the U.S., you don’t need to worry too much about whether or not your business will be legally protected abroad.
Should you incorporate (S-Corp/C-Corp) or form an LLC?
The answer depends on what type of entity is best suited for your needs.
An S-Corporation has no limit on its size; it can have unlimited members. However, if you plan on growing beyond $1 million in annual revenue within three years, incorporating might be better. You could also consider creating a C-Corp instead.
There are many advantages to forming a limited liability company instead of a traditional C-corporation. For example, if you want to protect yourself from personal liability as well as legal responsibility for debts incurred on behalf of your business, it’s important to consider whether you should incorporate in Delaware, Nevada, Wyoming, Colorado, Washington D.C., New York, California, Texas, Florida, Arizona, Illinois, Ohio, Michigan, Pennsylvania, Virginia, Maryland, North Carolina.
How to incorporate a business
Forming a corporation involves filing certain documents with the appropriate government agencies. The first step toward starting a corporation is deciding whether to incorporate or form an LLC. If you are considering either option, do some research and find the best structure for your situation. If you need help, speaking to a qualified business manager or accountant can help shed some light on the right decision for you.
Incorporating and taxes
The process of incorporating is relatively simple. You must first decide whether to be taxed as a C Corp, S Corp, or LLC. If you are incorporated in one state but operate out of another, it’s important to know which state will claim jurisdiction over any lawsuits filed against your company. Incorporation laws vary widely among states; contact your local attorney or accountant for details.
Get Help From the Experts at ZOMMA Group
If you are considering starting a new business, it’s important that you understand how incorporation affects your ability to protect yourself personally if something goes wrong with the company. Contact us to learn more about how we can help you value your business. Call us at 305.444.8288 to schedule a consultation.