Reduces Personal Liability
Incorporating or forming and LLC helps separate your personal identity from that of your business. Sole proprietors and partners are subject to unlimited personal liability for business debt or law suits against their company. Creditors of the sole proprietorship or partnership can bring suit against the owners of the business and can move to seize the owners’ homes, cars, savings or other personal assets. Once incorporated, the shareholders of a corporation or members of an LLC have only the money they put into the company to lose, and usually no more.
A corporate structure communicates permanence, credibility and stature. Even if you are the only stockholder or employee, your incorporated business may be perceived as a much larger and more credible company. Seeing “,inc.” or “corp.” at the end of your business name can send a powerful message to your customers, suppliers, and other business associates about your commitment to the ongoing success of your venture.
Tax Advantages – Deductible Employee Benefits
Incorporating usually provides tax-deductible benefits for you and your employees. Even if you are the only shareholder and employee of your business, benefits such as health insurance, life insurance, travel and entertainment expenses may now be deductible. Best of all, corporations usually provide an increased tax shelter for qualified pensions plans or retirement plans (e.g. 401K’s).
Easier Access to Capital Funding
Capital can be more easily raised with a corporation through the sale of stock. With sole proprietorships and partnerships, investors are much harder to attract because of the personal liability. Investors are more likely to purchase shares in a corporation where there usually is a separation between personal and business assets. Also, some banks prefer to lend money to corporations.
An Enduring Structure
A corporation is the most enduring legal business structure. Corporations may continue on regardless of what happens to its individual directors, officers, managers or shareholders. If a sole proprietor or partner dies, the business may automatically end or it may become involved in various legal entanglements. Corporations can have unlimited life, extending beyond the illness or death of the owners.
Easier Transfer of Ownership
Ownership of a corporation may be transferred, without substantially disrupting operations or the need for complex legal documentation, through the sale of stock.Centralized ManagementWith a corporation’s centralized management, all decisions are made by your board of directors. Your shareholders cannot unilaterally bind your company by their acts simply because of their investment. With partnerships, each individual general partner may make binding agreements on behalf of the business that may result in serious financial difficulty to you or the partnership as a whole.
Corporation vs. LLC
Many clients ask which is better, a corporation or an LLC. This is a complex issue and must be addressed on a case-by-case basis with the your attorney and your tax consultant. In California, some businesses such as contractors or attorneys cannot do business as an LLC.
The purpose of this article is to provide general information on the law, which is subject to change. If you have a specific legal problem, you should to consult a lawyer.
About the Author: Carl H. Starrett II has been a licensed attorney since 1993 and is a member in good standing with the California State Bar and the San Diego County Bar Association. Mr. Starrett practices in the areas of bankruptcy, business litigation, construction, corporate planning and debt collection.