Incorporation: What is it? What are the benefits?
Incorporation
Incorporation is NOT just reserved for those businesses that are well-established. It is generally a good business decision for most business owners. It works for all business sizes and industries.
What Does it Mean to Become Incorporated?
Incorporation is the legal process of forming a corporate company or entity. This process results in the separation of the company’s income and assets from those of its owners or investors.
Benefits of Incorporating Your Business
There are several benefits to incorporating your business in the United States, all of which you should fully understand before you decide what’s best for your business.
Brand Reputation and Prestige
Incorporating can help establish your legitimacy and build trust with potential customers.
Incorporation protects the business’ overall image from being used in undesirable ways or without the business owner’s consent. This is a huge plus for your business’ branding.
Taxpayer Protection
The vast majority of the IRS tax code (approx. 65K regulations), pertains to legal-artificial-entities; such as, for example – a corporation.
Without a corporation, an individual taxpayer has very few legal tax strategies available to preserve, protect, and create real financial wealth.
Personal Asset Protection
If you do not incorporate your business, your personal assets are automatically linked to your business. This may include your home, vehicle, investment accounts, and even assets that you obtain in the future.
If you were to file bankruptcy within your business, your personal assets could be used to repay your debt.
If you were to file for personal bankruptcy, your business could become an asset that can be liquidated to repay your debts.
Incorporation protects your business from all of these scenarios.
Tax Benefits
When moving from a sole proprietor practice to an incorporated business, there are numerous deductions at your disposal that are not available to individuals.
Specifically, you may see tax benefits such as:
The ability to spread out your losses over a larger period of time
The ability to deduct startup and operational expenses
The ability to deduct employee benefits
Your local and state taxing authorities may also offer other incentives to you more readily if you are a corporation.
Through leveraging tax benefits available to incorporated entities, owners can make reductions of over 10% of payouts in state and federal tax obligations.
Incorporation also allows business owners to tax-defer income up to $56,000 annually of gross income per shareholder through their own personal self-directed private pension account via SEP-IRA (a personal retirement savings plan).
Easier Avenues for Funding
Incorporating generally makes it easier for your business to raise capital or apply for a loan.
When you incorporate, it also means you can open up a bank account and start building a line of credit. Once the corporation has developed a credit score and proper references, it will qualify, by itself, for equipment and all vehicle financing or leasing up to roughly $600,000.
A business owner with an incorporated entity can also expect to receive major corporate credit cards totaling $150,000 within months of incorporation and receive access to routine 0% interest on credit for up to 18 months.
Your Business Is Alive Even If You’re Not
When your business is a corporation, it is its own entity. The company continues to exist even after you are gone.
Your business can still be sold or closed, but if neither of those things happen, your business will be in perpetual existence.
It may be easier to transfer ownership and funds when the business is a corporation than it is if you are running a sole proprietorship or Limited Liability Company.
Better Control over Retirement Resources
Incorporation opens the door to the corporate control and custodianship of retirement accounts which a business owner can exercise in order to personally manage retirement funds instead of deferring to 3rd party brokerage firms.
Think self-directed rollover of your existing retirement accounts like Roth IRA, IRA, 401k, etc.
This strategy permits access to one’s personal retirement funds without:
State and federal capital gains tax
or
Penalization for early withdrawal of funds
As a fairly common example with clients engaged in real estate operations, they use the funds for buying rental property.
This strategy has shown greater investment diversification and opens up new options for leveraging cash-flowing properties when securing new funding.
Stronger Record Keeping
Entity incorporation requires proper structuring and additional record-keeping for tax purposes. Though the additional record-keeping is more meticulous, it also means you’ll have a more clear, more accurate picture of the overall health of your business.
Detailed records can help you secure a loan from a lender and give you insight into your business’ health and better understand how to manage financial affairs and preserve wealth
Getting Ready to Create Your Own Business?
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Questions?
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Editor’s note: Nothing in this blog post should be construed as advice of any kind. Any legal, financial or tax-related content is provided for informational purposes only and is not a substitute for obtaining advice from a qualified legal or accounting professional.