Hundreds of thousands of businesses start up in the United States every year. For many, the first step in this process is incorporating. Incorporating is the process of creating a legal entity separate from the owners of the business. By doing so, the owners of the business can better organize their finances and limit their liability.
Why Should I Incorporate?
There are several reasons why business owners incorporate. Here are some of the more common reasons:
Limited Liability
The most common reason that business owners incorporate is for "limited liability." The act of incorporating a business creates a separate legal entity. Although the owner or owners of the corporation are legally connected to it by being the owner(s), the corporation is still a separate legal entity, and is often even referred to as a "legal person." It is as if, legally speaking, the corporation is an entirely different person than the business owner(s).
The owner(s) of a corporation are not liable for any obligation that the corporation is solely responsible for. Although the owner(s) of many small corporations often guarantee many of the contracts or other obligations of their corporation, the separate nature of the corporation is designed to, and does, offer protection. The corporate veil can sometimes be "pierced." When and how this occurs can often be complex, and is based on the particular circumstances of an obligation. However, the separate nature of a corporation does offer its owner(s) at least some level of "limited liability."
Accounting
Accounting is a complex task. Many business owners choose to keep themselves as sole proprietors, and delay or avoid incorporating completely, to try to simplify their taxes. However, business tax deductions are often easier to justify and manage after a business incorporates.
Whether incorporating will allow a particular business owner to deduct more business expenses then they would otherwise be able to depends a lot on the business and how it is managed.
Easy Transfer of Ownership
Incorporating makes the transfer of ownership of a business easier. If a corporation owns real estate or large assets, then no real estate closings or asset by asset agreements are needed. Often, a simple stock transfer is all that is needed.
Privacy
A corporation or LLC can be organized in such a way that the owners remain anonymous. Often, the same anonymity can be obtained for officers, directors, or members of a corporation or LLC.
Marketing
Often, having "Inc." or "Corp.," or another corporate indicator after the name of a company is part of the marketing model of that company, giving it more prestige. Incorporating can make a company appear bigger than it is, and can allow it to more easily raise capital.
How should I Incorporate?
There are several business entities a business owner(s) can form. There are not-for-profit corporations, limited liability companies, religious corporations, and regular corporations.
Limited liability companies do not have shares. Their profit structure is governed by an Operating Agreement, which is a formal document that explains how it is organized. They are more expensive to file in New York State, and, in New York, have a publication requirement that increases the cost of forming them.
"Hundreds of thousands of businesses start up in the United States every year."