Incorporating your business has legal, financial and tax advantages. You may not have any choice about paying for business licenses or permits, but the legal structure of your business is one thing that you can decide for yourself. Each state has regulations about what steps are required to register a business. In most cases, the Secretary of State's office handles for-profit and non-profit incorporation. Depending on your preferences and the type of business you are forming, you may be able to choose to register as a corporation (Inc.) or a limited liability company (LLC). Corporations have shareholders and a Board of Directors. LLCs provide a legal and tax structure that combines some elements of corporations and some elements of partnerships into a more flexible business entity.
Incorporating your business separates your personal and your business life in several areas. An incorporated business will have a separate legal and financial identity. This means that a dissatisfied customer or client cannot make claims against your personal assets in a lawsuit that involves your business transactions.
A corporation has a different tax obligation than an individual. The tax rate for corporations may be higher, depending on the chosen structure. On the other hand, your corporation may be eligible to deduct more business expenses than you would be eligible for without incorporating. Home business expenses often raise red flags with IRS auditors. Many fall into gray areas that make our tax codes subject to interpretation on a case-by-case basis. However, the cost of doing business for corporations is much more clear-cut.
The IRS uses two different methods for handling business profits and shareholder dividends, depending on whether your business is an S-corporation or a C-corporation (the most frequently used structure). Business owners need to understand the tax implications of both of these corporate structures; you should consult a tax attorney before making your choice.
The majority of banks in the United States require that you incorporate your business in order to open a business account. Business advisors also recommend that you keep business and personal funds separated. Comingling business and personal funds in the same bank account often results in legal and tax problems.
If your business does not have its own bank account, a court can rule that there is no clear separation of your financial life and the business entity that you own. If your business does not have a separate bank account, the IRS can also make a determination that all of your business profits are actually wages. The IRS will tax your business income at a different rate, with different allowable deductions.
Your incorporated business does not have to rely on friends, family and angel investors to find funding. Corporations can raise funds by selling shares of stock. A sole proprietorship or unincorporated business may have limited access to funding sources and credit.
Increased Business Credibility
Home based business and small businesses have gained popularity over time. However, your decision to incorporate can boost the confidence of your potential customers. Your investment in the fees and paperwork for incorporation can make your business appear more solid and credible than a similar business that has not been incorporated. It proves that your business is properly organized and that it has the capacity to fulfill legal and financial obligations.
A business that complies with state and federal regulations always seems more reliable and trustworthy than one that has no official registration.