What are the Benefits of Incorporation?

The benefits of incorporation (or forming an LLC) will far outweigh any disadvantages – as long as you are making some money off the venture.

As discussed at Should I Incorporate My Business there is some initial cost and pain involved in forming a business entity. However, the advantages of making your enterprise an official business can be huge. So, what are they?

1. Limited Liability -- Generally, if you are sued for something involving your business; you are not sued personally at all. It is the business that is sued and the business that will pay. In most cases that means that your personal assets will be safe. Even if the plaintiff wins the lawsuit, he or she will not be able to take your personal house, car or dog away from you. That should be a relief to find out. Notice I did use a couple lawyerlike “weasel-words” (i.e. “generally” and “in most cases”). I had to do that because nothing in the law is every 100%. There is always a possible exception. For instance if you engage in willful, intentional, reckless negligence in operating your business, and someone is hurt because of it – depending on state law – you may possibly be held personally liable. Still, all in all, incorporation provides very strong protection from personal liability in the vast majority of cases.

2. Tax Advantages -- There are numerous potential tax benefits in owning your own business. The particular tax benefits vary depending on whether the business entity is a C-Corporation, S-Corporation, or LLC. But, regardless of entity choice, any business will offer the opportunity to depreciate business assets and thereby reduce the taxable income of the business. I discuss the tax advantages of owning your own business more at Which Business Entity is Best?. But, for now, suffice it to say that you can reduce the taxation of the income your enterprise produces if it is incorporated.

3. Easier To Add Partners -- You will be surprised how your business grows and develops in different ways. If your business is anything like mine you will spend the first six months or so working hard, mostly alone, to grow it. But, after that, the business starts to gain momentum of its own. People start to find out about it. People start contacting you with various business proposals. Maybe they want to sell something through your business or join their business with yours in some way. Maybe you will want to buy another business together with them. Anyway, having your business organized as its own entity, rather than a sole proprietorship, will make it much easier to add partners simply by having them buy shares from you or contribute assets to the enterprise. Which leads to the next advantage:

4. Easier to Raise Money -- Maybe you will find out about an opportunity to expand into a new area or to buy a large quantity of inventory at a low price. You may need to raise money to do that. Similar to what’s discussed in the paragraph above, if you have a corporation or LLC, if is relatively easy to sell off shares to raise money. Depending on the type of business entity, you can even put various restrictions on the shares. For instance, the shares could be sold so that the purchaser has the right to share in the profits of the business but has no management rights. In this way you can raise money, share profits, but retain control of the business. None of this could be done if the business was a sole proprietorship.

5. Easier to Cash Out -- For the same reasons discussed in the two paragraphs above, it is much easier to sell a corporation or LLC than a sole proprietorship. For one thing, the buyer will be able to step right into your shoes and continue operating the business without having to form a new business entity or change any of the relationships already established by the business. Obviously that is much, much smoother and benefits the buyer tremendously. This means the business will be worth more to the buyer and you will be able to get a higher price for it.

Those are the basic benefits of incorporation. If you are interested in comparing the advantages and disadvantages of each type of business entity Go from Benefits of Incorporation to Which Business Entity is Best?

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