The first and foremost advantage of incorporation is to protect yourself from personal liability. When you are a sole proprietor or partnership you are liable for the business’ debts including if you are sued. This means creditors can go after your home, your car or your personal investments to satisfy any judgments against your or any debts the business has. With a corporation or LLC, the business is the one who remains liable for all debts including lawsuit awards. The owners only stand to lose the amount that is invested in the company and nothing more. Of course there are exceptions such as a fraudulently undercapitalized corporation or personal liability for egregious or criminal conduct. However, in most circumstances your personal assets will be protected. If you are also listed as a director or officer you will need an Indemnification Agreement to further protect you from personal liability. It is still advisable to obtain business liability insurance to protect your business and its assets.
Corporations and LLCs may be able to deduct more expenses than sole proprietors or partnerships. Corporations can offer stock option plans, retirement accounts and health benefits which may all be tax deductible expenses which can lower the overall taxable income of the corporation or LLC. Generally S Corporations are taxed at a lower rate than sole proprietorships. You may even be able to cut down on the amount of income taxes you pay as a sole proprietor or partnership since you can pay yourself as an employee of the corporation or LLC. You should speak to a tax professional regarding the tax aspects of forming a Corporation or LLC.
If you incorporate in Illinois, your company name is protected to a certain extent. No other corporation, Non Profit or LLC in Illinois can incorporate with your business name. When you are a sole proprietor or partnership, the company name is only registered with the county and other corporations or LLCs can still incorporate with your business name. You can even protect the business name further after incorporation by doing a federal trademark.
Another benefit is that since the Corporation or LLC is considered a separate legal entity from its owners, it will continue on perpetually, even if the owners die. The shares can be quickly distributed to family members without interrupting the flow of the business.
It simply looks better to customers when they know you are incorporated. It provides confidence and shows longevity in your company.
The Shareholders of a Corporation or the Members of an LLC are not listed on the articles or on the secretary of state website. Therefore, it is easier to keep the ownership of the company anonymous. The directors/managers or officers may be listed, but not the owners.
Easier to Sell
Since the corporation is a separate legal entity from the owners and has perpetual existence it is easier to sell. A sole proprietorship or partnership is tied to the individual owners and makes it more difficult to valuate and transfer. With a corporation or LLC it is easier to transfer ownership by selling your stock or membership interests to third parties. The company’s business will continue on under new ownership.
Easier to Get a Loan
Many financial institutions make it easier to obtain a loan if you are incorporated and can show a profit. Often times, sole proprietorships or partnerships are forced to incorporate after being in business for many years in order to obtain a loan. It would be much easier to start off incorporated and establish an incorporation date right from the start, even if you don’t know if you’ll want or need a loan later on down the line. Regardless of the credit rating of individuals, corporations have their own credit rating. Incorporating early and building up a good credit score for the corporation can help if you cannot obtain a personal loan.
Easier to Attract Investors
It is easier to attract investors when you are able to issue stock in return for their cash contributions. Keep in mind though, you may run into securities regulations if it is a large offering.
In essence, really the only drawback to incorporating is that it is some more paperwork. You will need to do minutes, file an annual report with the state and keep your corporate records in line. You will also have to pay to incorporate. But this is by far a small price to pay for all the benefits offered by incorporation.
When starting a new company many business owners struggle with this issue… Why Incorporate? What are the benefits? Is it right for me and my company? Why is this company incorporated and that one isn’t? Let’s go through the benefits of incorporating a business and see if it makes sense for your company.