Incorporating your business isn’t a complicated process, but it’s not a decision you should take lightly. Your business structure can affect your tax burden, ability to secure funding, and even which clients will work with you.
INCREDIBLY: What’s the primary advantage of incorporating your business?
NELLIE AKALP: The number one advantage of incorporating a business (or forming an LLC) is limiting your personal liability. When your business is structured as a sole proprietorship or general partnership, there’s no separation between you and the business. This means that if your business is sued or can’t pay its bills, then you are personally liable.
When you incorporate or form an LLC, it separates you and your personal assets from things that happen in the business. There are other benefits too — in some cases, you may be able to lower your overall tax bill by incorporating, and some clients prefer, even require, that they work with corporations or LLCs rather than individuals.
Are there any situations when it would make more sense to not incorporate your business?
Since incorporating helps minimize your personal risk, it’s a really important step to take, even for a solo business owner. It’s important to realize that court judgments can extend out as much as 22 years. So even if you’re just starting out and don’t have a lot of personal assets to protect today, you also need to think about protecting your future assets.
With that said, if you’re not certain if you want to own a business, then it may make sense to hold off on incorporating until you determine it’s the right path for you. However, you just have to be careful not to get too far down the road before incorporating. You’ll definitely want to incorporate before you start offering products or services to the public, or begin to hire staff or contractors.
How do you determine which structure would be the best for your business? Which factors do you need to consider?
This is a hard question to answer, since determining the “right” business structure depends on a lot of variables. General advice won’t necessarily be right for every situation. However, here’s the advice I typically give when someone is asking about business structure.
First, you’ll want to consider how much extra administration you want to contend with — small businesses that like to keep things simple may want to opt for an LLC over a Corporation. Depending on your tax bracket, you may be able to save on taxes by forming a Corporation. If you plan on keeping money inside the business, you also might want to form a C Corporation. If you’re going to be putting most of the business’s profits into your own pocket, then you probably want an S Corporation.
The three most common formal business structures are the LLC, C Corporation, and S Corporation. What people typically don’t know is that either an LLC or C Corporation can elect to be an S Corporation. So, you can form an LLC with the state and then choose to either have it taxed like a C Corporation or an S Corporation with the state.
What’s the most common mistake business owners make when choosing their business structure?
The most common mistake I see is that business owners spend considerable timing mulling over their business structure, but then don’t do anything after filing their initial paperwork.
Once you form an LLC or corporation, you have certain obligations to the state — typically on an annual basis. This can include filing an Annual Report/Statement of Information, keeping your Registered Agent up to date, etc. These are all very simple things, but if you overlook them, the state can put your business in bad standing and you’ll lose your personal liability protection.
What’s a PLLC, and how is it different from an LLC?
A Professional Limited Liability Company (PLLC) is a special type of LLC that’s designed for licensed professionals, such as accountants, doctors, architects. Some states require that licensed professionals (who are performing the services they’re licensed for) form a PLLC instead of an LLC.
To form a PLLC, you’ll typically need to have approval from your state licensing board and members must be licensed in the profession. In most cases, at least one licensed professional will need to sign the articles of organization to form the LLC.
For business owners who decide to incorporate as a PLLC, are there any extra precautions you should take to limit your potential liability?
The PLLC creates a separation between the individual owners and the business (like an LLC). But there’s a very important distinction. As a professional in a PLLC, you will still be personally liable for malpractice claims related to your own actions.
For this reason, you’ll need to have a good malpractice insurance policy even if you form a PLLC. However, a PLLC will typically protect you from personally liability for the business’ debts, as well as the malpractice of other owners within the company.
If you live in a state that allows you to choose between a PLLC and LLC, is there any reason to choose a PLLC?
First off, most states that have a PLLC structure will require professional service providers to form a PLLC instead of an LLC, so you may not have a choice. If your state does allow you to choose between a PLLC or LLC, there are a couple of considerations.
First, forming an LLC involves fewer steps than the PLLC, so if you like to keep things simple then you could opt for the LLC. However, forming a PLLC and adding PLLC after your official company name can give your clients the peace of mind that they’re choosing a trusted, licensed professional.
Does your business structure have any effect on your ability to obtain business funding? Are lenders more willing to provide capital to certain business structures?
Yes, business structure absolutely effects your fundraising. The first thing to note is that when you create a formal business structure like an LLC or corporation, the business becomes its own entity and will have its own credit profile. This will enable you to look for business loans. As a sole proprietorship, you’ll only be able to get personal loans for your business.
In addition, lenders like venture capitalists and angel investors prefer to invest in C Corporations — since they are more familiar with C Corporations than other structures and because a C Corporation provides the stock/shareholder structure they need. So, if you know you want to pursue VC funding, you should form a C Corporation, or be ready to convert your business to a C Corporation once you start looking for funding.
About Nellie Akalp:
Nellie Akalp is a serial entrepreneur, small business advocate, speaker, and author. Her first business was started with $100 and sold eight years later for $20 million. Today she is the founder & CEO of CorpNet.com, an online legal document filing service, where she helps entrepreneurs start a business, Incorporate, Form an LLC, set up Sole Proprietorships (DBAs) and more for their businesses.
Nellie was named Women Business Owner of the Year by NAWBO Ventura County in 2016 and was recognized as a Top 100 Small Business Influencer by Small Business Trends the last five years. Her company, CorpNet.com, was on the Inc. 5000 list of fastest-growing privately-held companies in America in 2015 and 2016.
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