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| Why should I form an LLC / Incorporate?
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Separation is key for any small business owner
When you form an LLC / Incorporate you are establishing a separate legal entity. This entity will be responsible for its own business affairs including debt. For example, if the entity signs a lease agreement then the LLC / Corporation is liable for that contract not you, the owner. If a sole proprietor signs a lease they are responsible regardless.
When you form an LLC / Incorporate you are also protecting your business from the shareholders personal debt. For instance, if a partner claims personal bankruptcy, the LLC / Corporation is not liable for the shareholders debt.
It is essential that you keep all personal and business finances separate. Have a separate bank account for each and only use the business account for business expense. As a shareholder you do have the right to take a draw of money, however you should write a check so that it is traceable. It is very tempting for business owners to give the sales clerk their business check card but you must not do this in order to maintain the separation.
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More money in your pocket vs. Uncle Sam's
When you form an LLC / Incorporate you have many business deductions not otherwise available to sole proprietors. Provided that your expenses are legitimate business expenses, you can deduct the following expenses and many more. Consult with an accountant/CPA for more details specific to your industry.
- Start up costs
- Advertising
- Insurance
- Wages and Salary
- Vehicle expense
- Lease/rent for the office
- Travel
- Entertainment
- Legal fees
- Interest on money borrowed/credit
When you elect to have your LLC / Corporation taxed as an S Corporation you can avoid double taxation. By electing to be taxed as an S corporation you can “pass through” the taxes and carry them over to the shareholders return where they are generally taxed at a much lower rate.
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Credibility with your clients
Your business has a great product or service. You are skilled at what you do or sell. How do your potential clients know that they can depend on you and that you are here to stay? When you form an LLC / Incorporate, you are demanding a sense of respect from your potential and existing clients. You are convincing them that you have legally filed with the state and thus you are dependable and committed to serving their needs.
When you are choosing a company to buy from or hire, which would you choose? The company that has no real name other that the owners (John Smith Lawn Care) or the company who has a legal name (Evergreen Lawn Care, LLC). Both companies are operated by John Smith however the LLC appears more professional to its potential clients.
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Ensure that your business will continue
An LLC / Corporation has the ability to have perpetual existence. As a shareholder, you can elect a specific date to dissolve, to dissolve upon the death of a shareholder, or to have perpetual existence. This election is made when you file your Articles of Organization or Articles of Incorporation with the appropriate state authority.
As a sole proprietor your business will cease to exist in the event of your death. The formation of an LLC / Corporation will ensure that your company will exist despite a shareholders death. This is essential for partnerships, including a husband and wife. This is also helpful for a business owner who intends to pass his/her company to a family member upon his/her retirement. See “Easily transfer ownership if/when necessary” for more information.
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Easily transfer ownership if/when necessary
When you form an LLC / Incorporate you establish a separate legal entity. This entity is easily transferred or sold. Simply put, you can sell your business or transfer ownership by notifying the state in which you filed your Articles of Organization or Articles or Incorporation. There is usually a small fee with the state. Incorporation Avenue, Inc can assist you in making these changes or answering any question that you have regarding the sale or transfer of your LLC.
For investors, you can buy real estate in the name of the LLC / Corporation and simply transfer the property with the sale or transfer of the entity vs. a typical real estate closing.
For companies with expensive equipment, by signing title over to your LLC / Corporation you are still able to maintain control of equipment yet gain the protection of an LLC / Corporation over your assets.
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Minimize IRS audits
As a sole proprietor the IRS requires that you file a schedule C (profit or loss from a business) when you file your 1040 year end personal tax return. This form (schedule C) has a high audit rate making sole proprietors more likely to be audited than corporations or individuals without business income. According to learnthat.com the IRS Audit Rates for Sole Proprietors is over 4% yet Corporations are audited less than 1%. You decrease your chances of an audit when you form an LLC / Corporation.
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Have the ability to raise capital, if needed
When you Incorporate, you have the ability to sale stock to shareholders/investors. This is an attraction to a potential investor. Due to the Corporations separate legal entity status, investors are more likely to invest with your company vs. a sole proprietor or partnership. Not only does the formation of a Corporation protect you it will also protect your partners and investors.
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