We’re not going to lie – having an “INC” or “LLC” after your business name can sound pretty impressive to some of your potential clients. With that said, deciding whether or not to take your business and incorporate it, especially if your business is pretty small, isn’t a decision you should take lightly.
by Benjamin Child via Unsplash
There are 3 different types of corporations, each of which is designed to protect the individual in some way. The costs are different depending on which one you choose as well as which state you’re in. At the same time there are both benefits and things to watch out for. Here are some thoughts we have on this.
First, the 3 types of corporations are: LLC (limited liability company); S-Corp & C-Corp. Let’s look at these separately first, just to set the record straight.
LLC‘s aren’t technically corporations. Instead, it’s used to define a company where each of the partners is responsible for sharing the profits and liabilities the company takes on. Each year they have to settle up, and then decide what to do with the profits.
The partners in a LLC might decide to be taxed as a full corporation or decide to be taxed independently. There are a lot of rules involving LLCs and each state treats them differently so it’s smart to talk to both a tax attorney and your accountant.
Some LLC’s are individual owners, and they can decide whether or not they want to be considered as a corporation or as a “disregarded entity. The filing requirements for each one is different so it’s a tough decision to make.
S-Corps offer the opportunity to not have to pay federal tax via the business. Each individual, known as shareholders, would be responsible for paying whatever they take out of the corporation for their personal use, which means if you’re a sole proprietor and you don’t take out all that the corporation earns, you’re only taxed on the amount you took out. This is actually a favorite classification for non-profit organizations since all profit goes back into the company.
C-Corps are the most expensive of all the options and both the organization and the individual gets taxed. Although that sounds bad, there are many protections C-Corps bring you, with the biggest one being if you’re sued it’s only your business that’s liable, not the individual or shareholders.
It also offers the advantage of being able to sell stocks in the company, which means if you’re creating products and need cash, you can obtain money by selling stocks to as many people who are willing to invest in your organization.
Only about 30% of small businesses incorporate, so this isn’t a necessary stop along the way. However, it can be beneficial to certain types of businesses and individuals, which is why it should at least be considered.
One, if you’re working in an area where liability against you could be costly, being incorporated means those you contract with can only sue the corporation, which protects your personal assets and bank accounts.
Two, if you have partners you can protect the business by setting up a legal structure in case the parties decide to break up or one partner wishes to divest themselves of the business. This will protect company assets and give shareholders the opportunity to keep out someone they might not want to work with as a partner.
Three, if you’re the entrepreneurial type who likes putting your hands into a lot of different things, you can tie them all under your corporation to protect them all. This of course might mean needing accounting services to help you keep track of each business but you should have an accountant anyway.
Four, from a marketing perspective you can make your business look more professional. If you work with out of area clients it makes your organization look bigger. You can officially call yourself either the CEO or President of your company, and immediately you’re the major stockholder in the business.
If you’d like more detailed information go to this link and look under the category “Business Types”. It might be beneficial to protect the future of your business.
