Articles Cristi Michelon Vasquez Santa Barbara Attorney

Incorporation Reduces Disaster

By Cristi Michelon Vasquez on Sep 13, 2018 at 12:00 PM in Entity Formations

You have heard the old adage......forming a business entity reduces liability. This is true and it is also true that forming a corporation is an effective tool for managing your business. There are five principal advantages to incorporating: liability protection; tax savings; increased credibility; investor attraction; and longevity. The main reasons for incorporating in California are: separate liability for corporate debts; creating a separate legal entity for personal protection; building corporate credit; anonymity; tax savings; law suit protection; small claims court benefits; perpetual duration; deductible employee benefits; and the ease of raising capital. Incorporating in California is possible by submitting formatted California Articles of Incorporation and other paperwork and fees to the California Secretary of State.

A corporation is a separate legal entity from you as a person and your personal affairs. Any debts incurred by the company are the responsibility of the company, not the owner(s). Any business with a potential for lawsuits (that is, any business in operation) should consider incorporation. Incorporation will offer an added layer of protection against liability for the owners. If you operate as a sole proprietorship or general partnership, you are personally responsible for any business debts or lawsuits against your business. Basically, almost anything you own can be at risk. But owners of corporations maintain separate business and personal identities. So if you're incorporated, your personal assets are protected from any liability incurred by your business.

Incorporation can also provide tax advantages to a business. Corporations are often taxed at a lower rate and have better taxable benefits. Talk to your accountant about the tax advantages of a corporation rather than a sole proprietor. For example, a corporation can write off what was once self-employment taxes. This alone could save your business the costs of incorporation in your first year. Corporations are taxed at a lower rate than individuals. And when you're incorporated or an LLC, expenses like insurance or travel and entertainment, for both you and your employees, can be tax deductible as business expenses.

Financing a small business as a sole proprietorship or partnership can be difficult. A corporation can sell shares of the company and raise money easier than other business structure types.

You may also improve your credibility by incorporating. Put simply, an Inc. after your company name implies a legitimacy to your business that will impress potential customers, vendors and lenders. It essentially says you're for real, you're committed, and you should command respect. The increased credibility is an important marketing advantage.

Attracting investors can also be achieved through incorporation. Corporations are allowed to attract investors through the sale of stock. And investors will feel much more comfortable if they are protected from any liability by virtue of your incorporation status. Additionally, this can allow you to maintain control of your company while achieving your goal of gaining working capital.

Longevity is also a goal of many companies. You have worked hard to build a business of stature in the community and now you want it to continue on in perpetuity. Corporations are enduring business entities. They have a business life that extends beyond an owner, principal or partner. Incorporation avoids any termination of the business in the event of long-term disability or death. It also provides for the easy transfer of ownership through the sale of stock to allow for generational passing of the torch.

Forming a corporation is not a complicated process and it can be made even more simple by finding the right professional to assist you. There are 6 simple steps to incorporation: 1) chose your corporate name and business address; 2) determine the best type of corporation for your business, i.e., S-corporation or C-corporation; 3) determine the managers of your corporation, i.e. Directors of the company and positions to be filed within the Articles of Incorporation and By-laws; 4) select the type of stock to issue; 5) file your documents with the Secretary of State; and 6) hold your initial corporate meeting.

The decision to incorporate or not is an important one. Work with your advisors to determine if the time is right for you. Don't wait until it's too late.