Your small business is on a roll. You’ve got a healthy pipeline of customers. Everything is going smoothly – and you’re focused like a laser on your products, business model, marketing plan, and balance sheets.
But what about your business structure? Do you think you don’t need to incorporate a business?
Many small businesses, particularly solo workers, overlook forming a legal business structure. The common thinking is that forming an Inc. or LLC can make life more complex for the small business, and the benefits don’t always pay off.
However, there are several reasons why a small business owner, even a solo contractor, should consider incorporating or forming an LLC. Here are some of the top reasons to think “Inc:”
Liability: Separate Your Personal and Business Assets
If your business does not have an official business structure, this means there’s no separation between your business and you. If you’re sued as a sole proprietor, you’re sued personally, putting all your personal assets at risk.
The LLC or Corporation (C Corporation or S Corporation) shield the business owner’s personal assets from the liability of the company. This means that once your business is incorporated (whether you form an LLC or Corporation), it now exists as its own business entity. As a result, the corporation or LLC is responsible for any of its debts and liabilities. This is often called the “corporate shield” as it protects the owner’s personal assets from the business.
I know that for most entrepreneurs, liability is farthest from your mind, unless of course, you’re a doctor or sky-diving operator. But, it’s hard to imagine that sitting behind a computer in your home office can put you at any real risk of a lawsuit. However, things can happen.
For example, if you’re a marketing contractor, an unreasonable client could sue you for breach of contract. If you make homemade soaps, a vendor may falsely label their products, causing you to unknowingly put the wrong ingredients in your ‘allergy free’ soap. Or a major client doesn’t pay you, making it hard for you to pay any of your own business contracts.
Certainly, those are all worst-case scenarios and there’s a slim chance you’ll ever run into legal problems. However, incorporating or forming an LLC can protect your personal assets from the worst-case scenario.
While liability protection is the main benefit for incorporating or forming an LLC, in some cases, corporate tax rates are lower than individual tax rates. And corporations and LLCs often qualify for additional tax benefits and deductions that aren’t available to individuals. Of course, specific circumstances vary, and you should consult with a CPA or tax advisor about your own particular tax situation.
You may find your sales grow after forming an LLC or incorporating, as adding an LLC or Inc. after your company name boosts your credibility in the eyes of some customers. In some industries, a formal business structure is required to win certain contracts. And when a contractor or freelancer has a formal business structure, a company that hires them will have the peace of mind that they are hiring an actual contractor and won’t have any trouble with the IRS for hiring a “full-time employee” as a contractor.
Better Access to Business Credit/Capital
Forming a corporation or LLC is the first step toward building your business credit. As a sole proprietor, you can only get a personal loan. And forming a C Corporation will be essential if you plan to seek Venture Capital funding.
Added Layer of Privacy
When you incorporate or form an LLC, there’s an added layer of privacy. In many cases, the registered agent of your corporation goes on record, and not your home or business address.
These benefits are all very important, even for the small, family-owned business. Having an Inc. or LLC after your company name isn’t just for large businesses with mazes of cubicles and a big payroll. Incorporating or forming an LLC can be one of the smartest steps you take for your business. Best of all, it’s far less time-consuming (and expensive) than it might seem.
Inc. Photo via Shutterstock
More in: Legal Structure