Even with all the resources available to new business owners, there are still some details that get missed. Those details can lead to financial, operational and even ownership disputes down the road. Here are a few reasons to incorporate that you may not have considered if you are on the road to starting your own company.
Liability
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Avoiding exposure to the vagaries of doing business with the public is the key reason most companies seek to incorporate. Aside from the obvious liability issues, the likelihood of a legal dispute in this day and age is high enough that incorporating almost becomes a reflex action even for a small company with a limited public presence. When a person or group incorporates, they are creating a separate legal entity capable of entering into its own agreements and defending itself legally in the event of a dispute. The owners of the company and their personal assets are shielded from liability for the actions of the company and have no financial stake aside from their investment in the company’s shares.
Business entities also give shareholders a flexible way to manage a company through the election of a board of directors and the indirect hiring of a management team. This can not only give the company valuable expertise, but it also distances the shareholders from the day-to-day decision making.
Taxes
Corporations and LLCs can receive favorable tax rates in certain circumstances and can deduct expenses that individuals may not be able to claim. Ownership of a corporation also entitles owners to their share of the company’s earnings at oftentimes considerably reduced rates over their after-tax personal earnings. There are ways to defer taxes on corporate earnings and also ways to protect income from capital gains depending on the circumstances of the sale.
Investment
The different business entities all have mechanisms by which they can sell ownership shares to investors, which can be used to capitalize operations, research and development, and hiring consultants and employees. This can be a highly efficient way to attract shareholders and potential partner companies in the open market. Certain kinds of corporations can also issue a public offering and sell shares to the general public if they qualify. These options are not available to sole proprietors and general partnerships by and large. Business entities are a complex subject. It is often a good idea to seek competent legal counsel before making a decision on how to proceed.
Incorporating a business, such as forming a corporation or a limited liability company (LLC), offers several benefits related to liability, debts, and more. Here are some of the key advantages:
- Limited Liability: One of the primary benefits of incorporating is the limited liability protection it provides to the owners (shareholders in a corporation or members in an LLC). This means that the personal assets of the owners are typically shielded from the business’s debts and liabilities. If the business incurs debts or faces legal issues, the personal assets of the owners are generally not at risk, with some exceptions for extreme cases of fraud or misconduct.
- Separation of Finances: Incorporating creates a clear separation between the business’s financial affairs and the personal finances of the owners. This separation can make it easier to manage the business’s debts, assets, and financial transactions, reducing the risk of personal financial entanglement.
- Easier Access to Capital: Corporations and LLCs have more options for raising capital. They can issue stock or membership interests, making it easier to attract investors. Additionally, the limited liability structure can make it more attractive for investors because they are typically not personally liable for the business’s debts.
- Credibility: Being incorporated can enhance a business’s credibility. It often signals to customers, suppliers, and partners that the business is more established and committed to its operations. This can lead to increased trust and potentially more opportunities for growth.
- Perpetual Existence: Corporations and LLCs have perpetual existence, meaning the business can continue to exist even if ownership changes or key individuals leave. This provides stability and can be beneficial for long-term planning.
- Tax Benefits: While the specific tax benefits may vary depending on the type of entity and the location, corporations and LLCs often offer tax advantages, such as opportunities for tax deductions, credits, and more favorable tax treatment for certain types of income.
- Enhanced Privacy: Incorporating can provide a level of privacy by allowing the business to conduct transactions and own assets under the entity’s name, rather than the personal names of the owners. This can be advantageous for some businesses and individuals.
- Employee Benefits: Incorporated businesses can often offer employee benefits, such as retirement plans, stock options, and health insurance, which can help attract and retain talented employees.
- Transferability of Ownership: It’s generally easier to transfer ownership in a corporation or LLC through the sale of shares or membership interests, making it more flexible for estate planning or selling the business.
- Legal Protections: Incorporating can offer legal protection in the form of standardized rules and regulations, which can help resolve disputes and conflicts among owners more easily.
It’s important to note that the specific benefits and requirements of incorporating may vary depending on the jurisdiction and the type of business entity chosen (e.g., corporation or LLC). It’s advisable to consult with legal and financial professionals to determine the best structure for your business based on your specific goals and circumstances.
“A Uniform Commercial Code (UCC) filing is a public notice of a secured transaction. A financing statement indicates a commercial agreement between a debtor and a secured party. Searches provide information on collateral. When a debtor pledges collateral on a loan, UCC search results tell lenders if others have filed a claim against the same collateral.” http://sos.ri.gov/divisions/Business-Portal/Forms
If you are seeking legal representation concerning corporate law in Rhode Island, contact Rhode Island business attorneys, Slepkow Slepkow & Associates, Inc.