WHY SHOULD YOU INCORPORATE
There are many advantages to incorporating or organizing an LLC. When you incorporate or organize an LLC, you are protecting yourself from personal liability. You will also be able to immediately take advantage of the tax system. Incorporating or organizing and LLC enables you to make use of a marketing framework and this in turn makes it a lot easier to raise capital & establish corporate credit. A Corporation or LLC may also take advantage of state laws that grant it more privacy. Certain states allow a Corporation or an LLC to be set up such that the shareholders, owners or members remain anonymous, and many times, the same anonymity can be accomplished for officers, directors or operating managers. In most states, the officers, directors and operating managers of a company are disclosed, however, shareholders, owners and members remain anonymous. Finally, a corporate or LLC structure can result in an easier transfer of ownership when it comes to various assets. We will now discuss these individual advantages on a more detailed basis.
Let us begin with the most important reason to incorporate or organize an LLC – that is to protect yourself from personal liability. When you incorporate or organize an LLC, you are forming a legal entity that is separate from yourself as an individual. The Corporation or LLC has powers vested upon it that allows it to make all the decisions that an individual may make. For example, the Corporation or LLC may enter into leases, the Corporation or LLC may borrow money, it may buy goods and services on credit, and in all cases you are not personally liable for the transaction. If a problem arises, the only recourse would be against the Corporation or LLC, similarly, if anyone were to ever file a lawsuit for an action arising out of the business of the Corporation or LLC, that party would not be able to go after your personal assets such as your home, or car or boat etc., as long as you comply with the formalities of a Corporation or LLC. Therefore you have the peace of mind knowing that your personal assets are safe.
The second area we mentioned dealt with tax advantages. In a corporate or LLC structure you can take what otherwise would be non-deductible personal expenses and turn them into legitimate deductible business expenses. In this area there is really no limit as to what you can accomplish with a little creativity. For example, it is well within reasonable grounds to have your annual corporate meeting of shareholders, directors or members in a far away “resort city” and deduct the expenses as a corporate expense.
Weekly meetings between a husband and wife as officers or directors of the Corporation or operating managers or members of an LLC, for example, at a restaurant, are deductible as a Corporate or LLC expense as long as the principle purpose of the meeting relates to the affairs of the Corporation or LLC. If the Corporation or LLC requires the use of your automobile, you can set up a vehicle lease and deduct that as a Corporate or LLC business expense. The same principle applies if you use part of your residence for business purposes. The Corporation or LLC is allowed to pay rent on the portion used and subsequently deduct it as a business expense. S Corporations and LLC’s allow losses of the Corporation or LLC to flow directly to the owners thus creating a deduction against the ordinary income of an owner form other sources, on the owners annual tax return. Although many business deductions are also available to sole proprietors, a major drawback is that the IRS Form 1040 and Schedule C (Profits or Loss From a Business) is the target of many IRS audits, however, compare this to the audit rates of similar businesses that have incorporated or organized LLCs and the audit rate is almost NIL. We have actually incorporated clients that have faced an audit as a sole proprietorship. These people decided to take advantage of the corporate structure after their audit. Do not let that happen to you.
Incorporating or forming an LLC enables you to make use of a marketing framework. You have the ability to hold the business out to the public as a Corporation or LLC. Corporations are usually viewed as bigger and more powerful operations than say “John Doe down the street”. This is particularly useful when you are trying to attract investors and raise capital so that your company grows. The fact that your business is recognized as a Corporation or LLC gives it immediate credibility in the eyes of potential venture capitalists and other providers of funds. This also holds true for establishing or reestablishing credit. If you have had prior credit problems on a personal level, it will not prevent you from establishing good corporate credit once you have completed the incorporation or organizing process.
The issue of privacy is also a great advantage to incorporating or organizing. In most states, the shareholders of a Corporation or members of an LLC are not disclosed and therefore are not public record. It is possible to set up your Corporation or LLC in such a way that your involvement in the company is never revealed. This does not hold true if you are filing an assumed name or DBA as a sole proprietor or partnership, wherein the names of the parties are disclosed on the assumed name or fictitious business name statement.
The final benefit of incorporating, that we will discuss, deals with the ease of transfer of ownership when it comes to assets owned by the Corporation or LLC. For example, if you own real estate, by putting it into the Corporation or LLC not only do you protect that asset from your personal creditors but if you needed to transfer that property to someone else, you could do so simply through a private agreement such as a stock transfer agreement, rather than go through a formal real estate closing. The stock transfer agreement would transfer ownership interest in the Corporation or LLC from you, to the person you are transferring to, and since the real estate is already a corporate asset, you are effectively transferring your interest in that as well.