When determining whether to incorporate or not, there are no clear-cut answers. It’s really a judgment call.
Of course, you need to talk to an experienced attorney. But it is also a good idea to get advice from successful business owners.
Despite all this, there are some general things to keep in mind. In fact, to get some insight about incorporating, I recently talked to Matt Kaufman, who is an attorney and the head of small business services at Rocket Lawyer. The company has an easy step-by-step system to form any type of corporation, whether a limited liability company (LLC), C Corporation or S Corporation.
Here are some of his takeaways:
Liability Protection: This is perhaps the biggest reason for business owners to incorporate. For the most part, your liability exposure is limited to the amount of your investment in the company. In other words, if you put up only $1,000 for startup capital, then this is all you stand to lose if something goes wrong.
And yes, lots can go wrong! Let’s face it, we live in a litigious society. Even a seemingly minor dispute can wind up turning into a lawsuit. But with a corporation, you will go a long way to help protect your personal assets.
But to get this, you must abide by the requirements, such as keeping corporate and personal matters separate, making the right filings and disclosures, keeping minutes and so on.
You should also try to avoid agreeing to a personal guarantee for a loan. Such a contract will mean that your corporation provides no liability protection.
Financing: In some cases, you may have no choice but to incorporate. For example, a bank will likely require that you incorporate. Or, if you raise equity capital, then you will need to do so as well.
Employee Matters: As an a corporation, you have more flexibility in providing fringe benefits, such as medical reimbursement plans or term life insurance. You will also be able to offer stock options or restricted stock, which can be a great way to attract and retain top talent.
Taxes: This should not be the main reason for incorporating. But there are certainly benefits. For example, with an S Corp, you can reduce some of the impact of the self-employment tax.