X-Banker

Benefits of Incorporating Your Business

Every so often I need to step back and focus on the basics. I deal with corporations and limited liability companies (LLCs) every single day and for me it is an automatic slam dunk that Americans need to be incorporated.

But I need to remember that we are not taught in schools why we should be incorporated. And we’re certainly not born with it. So now and then it is important to step away from all the bylaws and agreements and strategy brainstorming and pose the question: Why incorporate and what are the benefits of incorporating your business?

The answer is threefold: Protection, Taxation, and Credit.

The first big reason to incorporate is to gain asset protection. As you probably know – doing business in your own name as a sole proprietorship (or worse yet, as a general partnership) offers no asset protection. One claim and everything you own – not only your business assets but your personal assets as well – are exposed.

Using corporations and LLCs can protect your personal assets from creditor claims. And provide you with peace of mind.

You can also use more than one entity for even greater protections. For example, if your business corporation gets sued a judgment creditor could reach inside the business. But what if the valuable assets – the equipment, the trademarks and the machinery – were in separate LLCs and leased back to the corporation?

The answer is that those assets are not owned by the corporation. They are beyond the creditor’s reach.

The right use of entities can also save you on taxes, particularly on payroll taxes. Work with a good CPA and you will see the savings immediately. And remember, sole proprietors are audited at a five times greater rate than corporations and LLCs. A good financial advisor can help you maximize the benefits of business taxation.

The third excellent reason to incorporate has to do with credit. Credit for your business can be obtained through a corporation or LLC separate and apart from your personal credit. Remember, as your business grows and your credit needs grow with it you will certainly hit the limits on your personal credit. You need to establish an independent business credit profile for your future success. A corporation or LLC is the best vehicle for carrying forward this important strategy.

Three important strategies – asset protection, tax minimization and credit enhancement – are the core reasons for why you should incorporate.