Incorporate Now!
Small businesses can run into troubles with ownership and liabilities if they don't incorporate their businesses. Lock down your business now. Here's how.
Two winters ago, one of Corbet Brown's employees slipped on ice while getting out of the company SUV. The employee's leg fell underneath the vehicle, breaking his ankle. If this had happened four years earlier, and his employee had sued, Brown could easily have lost his personal savings and even his house. Luckily for Brown, his insurance agent convinced him to incorporate his Atlanta-based cleaning business before the accident occurred. So now, if one of his 13 employees, or one of his many clients sues, they won't be able to go after his personal belongings and savings - just business assets.
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Incorporating your small business is a big decision. Protection of personal assets is the main reason why most small business owners decide to incorporate, but there are also other compelling incentives. If you hope to expand your business or garner venture financing, for instance, incorporating your business can help. And finally, incorporating can often ease the strain at tax time.
Protect Your Assets!
In Brown's case, he had been in business six years before he incorporated because he had mistakenly thought his insurance would cover most of the costs of accidents or foul play. He did have adequate insurance that paid for100 % of his employee's medical bills and 80% of salary loss after the fall - but it certainly would not have protected his personal assets had the employee sued. "Luckily my car was parked when his leg slipped underneath. I don't want to even think about what could have happened otherwise. If someone can no longer work anymore, you could face a lawsuit for all potential earnings," Brown explained. Experts agreed with Brown and pointed out that clients and employees aren't the only ones who can go after personal assets - your bank can as well if you default on a loan.
"If you are operating your business as a sole proprietorship, your business and yourself are legally considered the same. You are still on the hook with a bank (that gives you a small business loan) because you will have to sign to guarantee the loan. If you default, the bank can go after your personal assets," explained Karen Nathan, director of business development for Business Filings Incorporated.
Go Ahead, Expand the Business!
Times sure have changed. You can no longer show a business plan sketched on the back of a napkin to a venture capitalist and get backing for your fledgling company. Today, if you want venture funding, you "have to be incorporated," says Jesse Reyes, VP global research at Thomson Venture Economics in New York. All 761 businesses that received venture money this quarter were incorporated, Reyes explains. "It's impossible to get venture funding if you aren't incorporated. It's not about liability, but about the class of stock the company will have. Typically, (venture capitalists) back S Corps or C corps," he explained. Times are, however, looking up for small businesses seeking funding. This quarter (Q2 2004) 229 "early stage" companies, defined as having a product in the pilot or test phase, received $1.17 billion in venture funding, a level not seen since 2002, according to the MoneyTree Survey by PricewaterhouseCoopers, Thomson Venture Economics and the National Venture Capital Association.
Even if you aren't seeking venture funding, being incorporated can help you expand your business. If you are a consultant hoping to land a large client, for instance, you may be taken more seriously as an S Corp or LLC than just a sole proprietor, says Nathan. And it's also easier to bring in new partners and hire employees when incorporated because you establish a level of credibility for consumers.
Don't Get Caught Paying Too Many Taxes!
No one incorporates solely to save on taxes. Corporations pay much higher taxes than individuals, but there are options that can allow you to benefit from the protection of being incorporated, while paying taxes at the lower individual rates, says Paul Gada, a senior tax analyst for CCH Incorporated of Riverwoods, Ill. If you form an S Corp, or an LLC, for instance, "pass-through taxation" is available, taxing your business at a lower rate.
Other tax perks are also possible depending on what state you are incorporated in, Gada explains. For example, Florida allows a capital investment tax credit for taxpayers that create at least 100 full time jobs in connection with a qualifying project involving aviation, aerospace, automotive, silicon technology or other "high impact" industries. There are also national tax breaks for specific industries, such as timber or daycare providers, that your company may qualify for.
Whether you seek protection of your assets; plan to expand your business; or seek tax breaks, the benefits of incorporation far surpass the risks of flying solo for many small business owners.
Laura Roe Stevens is an Atlanta-based freelance writer.
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