Business Incorporation 101

If you're a small business owner then you know all about risk. You may have mortgaged your house to get your business up and running, or given up your day job to focus on this new venture. All businesses have some element of risk, but for sole proprietors and partnerships the risk is personal. As a sole trader or partnership you are personally liable for debts that are incurred from the business, including loans and legal outcomes. If you're business loses greater than your initial investment it is you, as the small business owner, who will be responsible for the deficit.

From Business to Corporation

Business incorporation limits the liability of investors to only the amount that they've invested. Limited liability companies (Llc) have the similar benefits to corporations. Incorporating your business will ensure that while you may, in a worst case scenario, lose what you've invested in the company, you cannot lose more than this. Directors and stockholders is most cases have no liability for company losses. Articles of incorporation are easy to file and becoming a corporation is a relatively painless process. Essentially, business incorporation offers more protection for small business owners than going it alone.

Llc formation allows the business owner to have some benefits of being a corporation and some of those of a partnership. Llcs have more flexibility than corporations but are still protected against losses that are greater than the initial investment. Llc formation is often the most suitable option for sole small business owners. Llcs and corporations are in the privileged position of being able to hold assets that are personal in nature, including cars and houses. As assets of an Llc or corporation these items can be protected, although is some cases creditors who are owed may seize shares of the corporation. In most cases these assets can be protected by holding them in a corporation.

Business Incorporation versus Limited Liability Companies

Llcs and corporations operate under different tax laws. Llcs are treated as partnerships although in some cases they can opt to be treated as corporations. If treated as partners there is less tax advantage to be had, but partnerships offer flexibility in other areas. Business incorporation offers taxation at a lower rate than sole traders and can carry income losses into the tax year. Sole traders are limited in the losses they can claim but corporations claims per year are unlimited which can be hugely beneficial in the first few years of business when losses are more likely than gains.

Your First Step to Success- Articles of Incorporation

Articles of incorporation are the first step for you in becoming a corporation. Business incorporation fee's can be as low as $25 in some states, and this is when you'll be asked to disclose the purpose of the corporation, the place of business and the number and type of shares involved. Llc formation is also simple. Articles of organization are the equivalent to article of incorporation, and these must be filed as evidence of the company's existence.

The Benefits of Business Incorporation

Business incorporation also offers the advantage over sole trading or partnerships when it comes to credit ratings. The credit rating of a corporation if not affected by the owners own personal credit history. Incorporation makes it easier to organize retirement funds and transfer ownership of part or the whole of the company. Unlike people, corporations are capable of continuing on indefinitely, being unaffected by death of directors, officers or shareholders.

As I've mentioned above, incorporating your small business has numerous legal advantages. If you're a sole trader then Llc formation is a good option for your business, while for the rest there's business incorporation. Reporting after incorporation is straightforward and becoming a corporation offers you protection against losses. Anything can happen any day and making your small business a corporation offers you limited liability protection. So go and organize your articles of incorporation and get down to the appropriate state office. You've got nothing to lose by becoming incorporated and everything to gain.

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