Entity Formation Mistakes to Avoid

Benefits of Incorporating Your Business


There are several benefits of incorporating your business including separating your business liability from your personal assets, your personal and business credit, and potential tax savings depending upon levels of profits.

Here are additional benefits of incorporating your business, that most don’t consider, but should to grow your business.

The benefits of incorporating include increasing your profits through joint ventures.
The benefits of incorporating include increasing your profits through joint ventures.

Marketing and Joint Venture Advantage

Which sounds better: “It’s the CEO of ABC, Inc on Line 1 for you, Bob,” or “It’s the owner/operator (meaning a sole proprietor) on line 1 for you, Bob”? As a new business owner attempting to get through a gatekeeper, every minor advantage helps! So many miss this door-opening opportunity, even though it could spell the difference between prospering and being out of the game in the first 90 days.

At NCP, we have our own policy regarding Joint Ventures (JV). If a sole proprietorship calls and wants to do a JV, that means one of three things:

•  They have no profits in their business;

•  They don’t believe they will succeed, so they didn’t spend the money to incorporate;

•  They have a “Let’s try it out first to see if it works, then incorporate later” mentality.

Our standard answer is, “Thanks for calling, but we’re unable to work with you right now.” Of course, they never hear the “real reason” they were rejected; nor will you, because now you know not to make this mistake in the first place.

•  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 be deductible. There have been several changes since the 2018 tax law changes as to what is now deductible and what is not. 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

It’s easy to raise capital for a corporation through the sale of stock. Investors are much harder to attract to sole proprietorships and partnerships, because of personal liability. Investors are more likely to purchase shares in a corporation, where there is a separation between personal and business assets. (Some banks, as well, prefer to lend money to corporations.) This is not as common, at the small business level, as it sounds, because the process can be complicated and require the proper attorneys to make sure you are not violating any security laws. Unfortunately, many small businesses seek investors and never consult with a securities attorney.

•  An Enduring Structure

A corporation is the most enduring legal business structure. Corporations may continue on regardless of what happens to their 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 through the sale of stock without substantially disrupting operations or creating the need for complex legal documentation.

•  Anonymity

Corporations can offer anonymity to their owners. For example, if you want to open an independent small business and don’t want your involvement to be public knowledge, your best choice may be to incorporate. But if you open as a sole proprietorship, it’s hard to hide the fact that you’re the owner. As a partnership, you’ll probably be required to register your name and the names of your partners with the county officials and/or state in which…

•  Centralized Management

With a corporation’s centralized management, all decisions are made by the board of directors. Shareholders cannot unilaterally make binding agreements on behalf of the business simply because of their investment. With partnerships, each individual general partner may make binding agreements that may result in serious financial difficulty to you or the partnership.

There are many benefits of incorporating your business, beyond if it will save you on taxes. Building a real business and a brand requires a solid foundation, and that starts with an LLC or corporation.

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