In many cases, small businesses start as sole proprietorships. Owners often like the convenience this structure offers, but this simplicity comes at a price. For one, the company’s and the individual’s finances are tied, and it leaves the owner personally responsible for any debt or legal action the company faces. The next option is to go for an LLC or corporation, which is an ideal structure for a growing company. Let’s take a look at some of the benefits of incorporating and why you should consider making the switch right now.
DBAs Are Not Enough
An LLC will give your business more credibility. A lot of people will think that working under a DBA name is enough, but this can cause issues later on.
Let’s say that you own a solar panel company, but also want to do plumbing on the side and your name is Dave Allen. You could use Dave Allen Solar Panels for one business, and Dave Allen Plumbing for the other arm. These are both examples of DBAs, but LLCs can use them as well.
There are tons of issues with sole proprietorship DBAs, however. For one, you won’t own any of those names, and pretty much any one can snag them up. Second, you still won’t get the protection LLCs offer. Third, while your DBA name can be registered, it will usually be at the local level only. With an LLC, you will usually have instant protection against someone registering your name along with all the additional perks it offers.
Personal Asset Protection
This is probably the biggest benefit of incorporating. The LLC becomes a separate entity, and is no longer tied to your personal assets. That means that you’ll have limited liability for obligations and debt if the corporation is properly structured. However, note that there will usually be more formalities in the case of a corporation.
LLCs also have the benefit of being able to survive even if ownership changes. If the owner passes, or decides to sell, the entity can still exist. If the owner of a sole proprietorship dies however, so will the business.
Tax Flexibility and Deductibles
Many of the benefits of an LLC are at the tax level as well. With an LLC, profits and losses can be passed down and reported on the owner’s tax return. But they can also elect to have the LLC taxed as a corporation. People who set up corporations will usually have to be taxed on the corporate and individual level, but this can be avoided by forming an S corp, provided they meet the requirements.
Forming a corporation also allows you to deduct some of your expenses. Things like equipment, fuel, salaries, etc., can all be deducted before allocating income to owners.
There is no doubt that forming a corporation is usually the best way to go if you’re serious about your business and trying to take it to the next step. You can’t afford to leave yourself open to financial catastrophe because of a legal dispute or debt, so make sure that you consider the option today.