Should you upgrade from sole proprietor to Inc. or LLC? The entity or business structure that you choose can impact the future success of your business, whether you are part of a family partnership that’s been around for years or are an entrepreneur in the startup phase of your next venture.
Simply put, incorporating your business creates a legal entity that is separate from the individuals who create and run it. Here are five reasons you may want to consider incorporating your growing business.
When you operate your business within a corporation, creditors are often limited to corporate assets to satisfy a debt. Your home, savings, and retirement accounts are no longer fair game.
“An LLC is also useful for holding and segregating personal assets and investments for liability purposes,” adds Associate Partner Rich Middleton, CPA.
The corporate form can help protect you against claims made by others for injuries or losses arising from actions of your business.
You can help build your business by issuing shares to new investors, or by offering stock options to key employees as a form of compensation. Per Rich, “It can also facilitate estate and succession planning through the issuance of shares to family members.”
A corporation can provide you with more tax flexibility. Plus, corporations and LLCs often qualify for certain tax deductions and benefits.
“Distributions from a “C” corporation may qualify for preferential tax rates and distributions from “S” corporations are not subject to self-employment taxes,” says Rich Middleton, CPA.
Deliberate planning with your CPA can help optimize the taxable division between corporate income, dividends, and your personal wages.
For instance, “You could have your corporation elect Sub Chapter S Status so that the income and loss passes through to the shareholders, much like an LLC or partnership,” advises Associate Partner Mike Engleman, CPA.
Being incorporated adds to your credibility, sending a signal that your business is a serious enterprise and it could open doors to opportunities not offered to sole proprietors. Consumers, vendors, and other businesses often prefer to do business with incorporated companies, including venture capitalists and investors.
Corporations may appear like more work and additional tax responsibilities for a business owner, but you are being proactive about protecting your personal and family assets, giving longevity to your company’s future, and adding credibility and trust to its growing brand.
If you are still going over the pros and cons of incorporating your company or family business, pick up the phone to speak with your CPA or business advisor. Together, we can complete a thorough tax review that will help shed light on the impact such a move will have on your business’ situation and circumstances.
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The information contained in this newsletter is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance. For more information or for assistance with any of your tax or business concerns, contact our office at 856.667.4100.
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