Should I incorporate?
As a business owner, how can I protect my personal assets?
If you're a business owner, and you are concerned about limiting your personal liability for business debts, you should consider organizing your business as either an LLC, (Limited Liability Company), or a Corporation.
Conducting business when organized as a Corporation or an LLC, (Limited Liability Company), brings a large number of opportunities and benefits. Financial institutions and other businesses tend to prefer conducting business with companies organized as a corporation, rather than a sole proprietorship. Many laws also favor Corporations and LLCs over sole proprietorships. Also, it is usually far easier to capitalize a corporation by selling shares of stock, or securing loans.
Anyone doing business with the public is at risk of being sued. It is very important to mitigate this exposure as much as possible. The two best defenses for business are avoidance of a suit by minimizing any risks, or liability insurance. The best way for owners of a business to reduce their personal liability exposure is either to incorporate their business, or form an LLC. When a corporation or an LLC are sued, there are provisions in the law to protect the personal assets of shareholders and mangers from any damages the company may become liable for.
The LLC (limited liability company) is the newest form of legal business entity. It has become very popular among entrepreneurs and professionals. State laws and federal tax regulations controlling how an LLC is taxed are evolving with very favorable trends toward small business, much like the advantages afforded Corporations.
Utilizing the most advantageous organization for your business structure will allow better control of tax liability and reduce risks to investment capital. Many businesses start as a sole propietorship, or a simple partnership, because these are the easiest organizations to form. These type organizations however, do not usuallay provide the best environment in which to operate a business. Some advantages of a more formal structure such as an LLC or a Corporation include such things as separation as a legal entity, protection of the personal assets of the owners, protection of the Company assets from the owners and officers, certain tax advantages, establishment of a business credit line, some employee benefits are deductible, it is easier to solicit investors, borrowing capital is easier, the business enjoys more credibility with the public, and the owners can have some anonymity
Are there tax advantages to incorporating my business?
By legal definition, a corporation is a legal entity which can own assets, assume liabilities, and tender stock/securities to the public, among other things. A corporation can be formed in any state by an incorporator under the General Corporation Law of that individual state. Generally this is accomplished by filing requisite Articles of Incorporation with the state and paying required state fees and taxes. All stock in a corporation may be owned by a single individual. As long as the appropriate organization is utilized, and requisite operating procedures are followed, the company and the individual can remain separate legal entities. Normally those who own shares in, or work for a corporation are not responsible for the corporation's liabilities. On the other hand, corporate liablilities often have a negative impact on the value of the company's stock.
Stockholders may become liable for Corporate debt if they have personally guranteed such debt. In rare cases, stockholders may be held liable for debts of a corporation if a court elects to "pierce the corporate veil" and apply "alter-ego liability". This removal of the corporate shield ususally results from a corporation’s failure to follow certain, relatively simple formalities, such as having a board of directors, having an annual stockholders meeting, and keeping company books and records. Such action may also result if the court feels owners are using a corporation to further their own personal adgenda, to defraud business creditors, or to engage in some illegal act. In general, if a corporation suffers a loss, the corporation itself must bear the cost of that loss to the extent of its own value. The personal assets of the individual shareholders would not normally be effected. Shareholders do however indirectly bear any loss by a decline in the value of their stock in the corporation.
Is it easier to capitalize a proprietorship or a corporation?
Incorporated businesses are afforded tax benefits from the IRS and state governments which are not available to sole proprietorships and other types of business structures. Incorporated entities are taxed at a lower rate than most other types of business organizations, or individuals.
A corporation can own shares in other corporations and collect dividends at a greatly reduced tax rate. A corporate entity can carry any amount of capial loss forward to subsequent tax years. Sole proprietorships, on the other hand, are severely limited in the amount of capital loss they can claim, and carry forward. A corporation is afforded preferential treatment for expenses such as pension plans, savings plans, Insurance and medical costs, capital investment in the business, business travel, client entertainment, , and the possible tax audit.
Certain types of corporations are allowed to file for S Corporation status. “S” status allows the entity to pass taxes straight through to the owners, thus the entity does not pay taxes, only the owners do.
Tax advantages for C-Corporations, S-Corporations, LLCs (Limited Liability Companies), LLPs ( Limited Liability Partnerships), Propietorships, Partnerships, and other types of business structures can be quite different and quite complicated. A tax professional should be consulted for details and advice as to which entity is appropriate for any particular business situation.
How a buiness is organized often greatly influences it's ability to secure capitalization. As a general rule, it is easier for a corporation to raise capital than it is for a partnership or proprietorship. A corporation usually has greater credibility with the public. Investors and lenders are often more likely to put money into a corporation, when compared to a proprietorship or partnership. A corporation, on the other hand, can not only borrow money, it can also issue stock, bonds, or other types of financial instruments, as permitted by the general corporation law in it’s state of domicile. A corporation, being a legal entity, is responsible for it’s own actions. Shareholders can invest in it without being held liable for the corporation's decisions, or debt.
Investment in a partnership or proprietorship is usually limited to the owner’s assets, the income the business produces, or borrowing money from family, friends, or lenders, and the owners are liable for company decisions and financial liabilities.
In terms of value, sole-proprietorship or partnership businesses are usually sold for one to two times annual earnings, whereas corporations are often valued at between 12 to 25 times annual earnings or more.
Frequently Asked Questions (FAQs),and other pertinent
information regarding Incorporating in Delaware, establishing a business
presence in Delaware, and Delaware Registered Agency can be found on the
Delaware Secretary of State's web site.