Whether you’re considering starting your own business or you have one that’s already in full swing, the New Year is a perfect time to reassess what’s next for your business.
Is it time to take that next step and get legit with a formal business structure?
Most small businesses start out as sole proprietorships (or partnerships when you have multiple owners). However, many eventually outgrow the sole proprietorship and transition to a formal business structure down the road. If you haven’t formed an official business structure, this is a good time to explore the possibility.
As an entrepreneur myself, I understand that legal paperwork doesn’t rank high on the priority list. Yet forming a legal entity for your business can help you grow more smoothly and avoid legal pitfalls in the coming years.
And in case you’re wondering what a ‘legal entity’ is, it’s a formal business structure like a C Corporation, S Corporation, or Limited Liability Company (LLC). Forming one of these entities means that the business exists on its own, separate from the business owner.
Incorporating or forming an LLC offers several advantages, including:
1. Minimizing personal liability
A formal business structure separates your personal assets from the business and therefore, minimizes your personal liability. This is an important to protecting your personal assets (such as your personal property or your retirement savings) from any liabilities of the company. So if your business should be sued or can’t pay its debts, your personal property may be shielded from any judgment.
2. Tax flexibility
A Corporation or LLC can give you more flexibility when it comes to taxes – including the ability to avoid self-employment taxes and to enjoy additional tax deductions. You should talk to your CPA or tax advisor to get specific advice on your personal situation.
3. A layer of privacy
With a sole proprietorship, you need to use your personal name and contact information (including your home address) to represent your business. With the LLC and Corporation, you typically have a Registered Agent as your business address. Even if you aren’t ready to Incorporate or form an LLC yet, you should at least get a Federal Tax Identification Number, also referred to as an Employer Identification Number (EIN), from the IRS, so you can stop using your personal social security number for any business transactions.
4. Builds business credit
A Corporation or LLC lets you start building your business credit. Many small business owners rely on the strength of their personal credit to fund their business. However, using business credit separates your personal activities from that of the business. In order to start building business credit history, you’ve got to separate the business from the personal owners and this means setting up a legal business entity such as a corporation (C Corporation or S Corporation) or LLC. You might not be thinking about a business loan now, but sometime down the road you might want access to extra capital. By building your business’ credit history as early as possible, you’ll be in a better position to secure a loan or a better interest rate.
5. State protection
A Corporation or LLC protects your business name within your state. Once your Inc. or LLC application is approved, your business name is registered and no one else can use that name in your state. Of course, keep in mind that while incorporating or forming an LLC protects your business in your own state, businesses are still free to use your name in the other 49 states. In order to protect your brand nationwide, you may want to look into trademarking your business name, product name, or other tag line. Start researching how to trademark to determine if it should be a course of action for 2013.
6. Lends credibility
Forming a Corporation or LLC can give your small business more credibility. In some cases, customers and clients may feel more comfortable working with an Inc. or LLC than a sole proprietorship. So, consider getting a formal business structure as part of your marketing strategy to promote just how professional, trust-worthy, and secure your business is.
When it comes to selecting which business structure is right for you, you might choose among an LLC (great for small businesses that want legal protection, but minimal formality), an S Corporation (great for small businesses that can qualify), or a C Corporation (for companies who plan to go public or seek funding from a VC). Do some research to determine what’s best for you or talk with a CPA or tax advisor. Unless your business is particularly complex, you should be able to incorporate or form an LLC online, without having to retain a business attorney.
Wondering what business structure is right for your business? Use CorpNet.com’s free Business Structure Wizard tool to find out!
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