Many small business owners have started their businesses as “sole proprietorships”. It happens naturally, you merely started offering a service or even selling a product. That is the legal default. However, your business structure has important implications and continuing as a sole proprietorship has serious risks. Thus, many developing businesses decided on company incorporation, due to the probable liabilities and risks.
Incorporating your business has a lot of advantages, especially for your personal assets. There are many options for corporate structure. The sole proprietorship is the legal default and the simplest among all. You don’t need to file anything or register.
The tax for a sole proprietorship will be a personal income, and you are liable for the business. Also, you can operate as a partnership when there are numerous owners. It is also taxed as a personal income and personally liable. You can also choose to incorporate a business.
Incorporating a company may sound complicated and technical, yet simple.
Types of corporations
There are two forms of corporations when incorporating your business, namely:
- Traditional C corporations
- S Corporations or S Corp
Both types of incorporation have limits regarding personal liability as a business owner.
The S corporation profits are to be taxed as personal income. Yet, the business is only responsible for the debts and operations. C corp. has a separate legal entity and is taxed as corporate tax.
With an S Corp, the company has the sole liability.
Why is incorporating a company worth it?
Asset protection
Business liability is one of the reasons most small business owners choose to incorporate a business. All corporations have different entities for legal purposes. The corporation owners don’t hold any personal responsibility for possible financial obligations. Also, the business owners of a corporation are not personally liable when it faces a lawsuit.
The primary point of this is that the corporation’s owners’ personal property and assets are protected. The possible issues that the corporation may be facing are:
- Lawsuits
- judgments
- Liens
In business law, the corporate owner and the corporation are considered separate entities. Therefore, in case your incorporated business loses in a lawsuit, personal assets would not be on the line. The personal assets mean here are:
- bank accounts
- savings
- home or cars
Indeed, these personal assets will be protected. Also, it has the same corporate protection rule that applies to any outstanding corporate debt. Even if the corporation declares bankruptcy, personal assets will not be at risk. Hence, many business owners find this a “corporate shield”, making it enough reason to incorporate.
To get full corporate protection, a company should adhere to the corporate structure and obey all the relevant corporate laws. Or else, there will be disputes about:
- piercing the corporate veil
- attaching the owners’ assets
Business owners who plan to incorporate their companies must read the law in their state about incorporating a company. There is detailed guidance about how to be recognized as a corporation. Since every state has different laws abided by the business owners, it must be understood first.