What does it mean to “incorporate” your business? Answer: You can incorporate your business by forming a separate legal entity, typically a corporation or limited liability company, through your State. If you are already conducting business when you incorporate, then you are converting either your sole proprietorship (if you are doing business alone) or your partnership (if you are doing business with others).
When you incorporate your business, you are forming a legal entity, an entity that exists separate and apart from you individually. After incorporating, clients will conduct business with your legal entity as opposed to you individually. Therefore, most liabilities will remain the responsibility of your business – i.e., business debts and liabilities generally will not result in you losing your home or personal belongings. Some notable exceptions to that rule are when you sign personal guarantees, are subject to individual liability by statute, or when you fail to respect the separation between you and your incorporated business to the extent that it subjects you to individual liability (this is referred to as piercing the corporate veil).
Tax Optimization
Formation of a corporation or Limited Liability Company will provide you access to tax benefits that are generally not available to a sole proprietorship. In fact, the decision between forming a Limited Liability Company or an S Corporation is often driven by the tax implications associated with each entity. As a business owner, you should develop a relationship with a qualified tax advisor and seek their advice as to the type of business entity that will provide you with the most tax benefits. A tax advisor will not be someone who only prepares your tax return each year, but one who will assist you with complex tax planning strategies that will help you and your business realize significant tax savings.
Easier To Raise Capital/ Obtain Bank Loans
Typically, it is easier to obtain financing from lending institutions when you have incorporated your business. Additionally, if you need to raise private capital, the ability of board or director seats, phantom shares, and general stock/ membership interest of your company often allow you to be more creative in the way the deal is structured. Furthermore, the longer you have your company, the easier it is to obtain traditional financing from a bank.
Credibility
Individuals and other businesses are accustomed to doing business with a Limited Liability Company or Corporation. When others see that you are incorporated, it tends to reflect that you are serious about your business, increasing your credibility and presence in your community.
If you are considering whether to incorporate your business, you should consult with an attorney and tax professional to ensure that incorporating is best for your business both from a legal and tax perspective.
Please feel free to contact Lockhart Law Firm, APC with any questions you may have regarding the incorporation of your business in California at (951) 461-8878.
(The foregoing does not constitute legal advice. If you require legal advice as to your specific situation, please consult with an attorney.)