WHY CONSIDER INCORPORATING OR FORMING AN LLC?

You don't have to be a large operation with dozens of employees to benefit from incorporating. In fact, quite the opposite is true. Many corporations are home-based, one-person businesses with less than $50,000 in revenue. Others are just getting started and have less revenue.

Why do businesses and investors consider incorporating? Here are several benefits:

Liability Protection—In our increasingly litigious society, it is becoming ever more important to personally limit your exposure and protect yourself from liability. As a sole proprietor, your liability for business debt is unlimited; personal assets such as your home, personal bank accounts and other valued assets may be at risk. Forming a corporation or LLC builds a brick wall between your personal assets and your business assets. This helps protect your personal assets from the risks and debts associated with running your business.

Corporate Credit—By establishing a Corporation or LLC and obtaining a separate tax Identification Number (EIN) a corporation will be able to establish its own credit profile separate from its owners/directors. As your business grows the need to establish business credit will most likely arise. You need to avoid using personal guarantees to obtain credit for the business. When officers and owners use their own personal credit profiles to obtain credit or obtain credit cards for the business, they risk the chance of personal liability, and weakening the corporate veil by co-mingling financial transactions.

Legal Separate Entity—If you are a foreign investor or work in the US with a vista, the best and safest way to start a business would be to establish a corporation. We can obtain your Tax Identification Number (EIN) with an ITIN or foreign passport. This will allow the corporation to establish credit and protect all assets within the corporation.

Tax Savings—As your business income grows, there may be tax advantages to incorporating and paying taxes at corporate tax rates rather than personal tax rates. Additionally, if you're paying substantial self-employment taxes today, forming an S-corporation could help you save on income taxes. Tax-related issues will be discussed in greater detail in the next section.

Reduced Probability of a Tax Audit—Sole proprietors tend to be more likely to file incorrect returns (many are self-prepared), and tend to underreport revenue or over-report deductions. For these reasons, the IRS has continually audited a much higher percentage of sole proprietor tax filings than corporate filings. In 2004, 1.86% of sole proprietors with earnings of >$100K were audited, where only .19% of S Corporations were audited. In other words, you are ten times more likely to be audited if you are a sole proprietor.

Establishing a Professional Identity—Many small businesses choose to incorporate or form an LLC to prove their legitimacy to both customers and suppliers. Including the Inc. or LLC at the end of your business name in all marketing and communications can help to separate you from the competition.

Raising Capital—If you would like to raise capital, incorporating or forming an LLC also increases the legitimacy of your company, which is more attractive from a potential investor's point-of-view. Investors are interested in making sure they are investing in a sound business—a business that has followed through with the proper formalities (whether you've formed a corporation or an LLC).

Corporations Continue—A corporate entity carries on when its owner(s) die. This is not possible with a sole proprietorship or a partnership. Living family members can carry the business forward, or the corporation can be sold.

More Business Opportunities—Larger corporations will be more likely to do business with a smaller company that is either an LLC or that has been incorporated simply to avoid liability issues.

While there are many advantages to incorporating or forming an LLC, these business structures are treated differently from sole proprietors, some of which are outlined in our Help Me Choose section. You can also call us at 1-800-604-2471 for more information.