Many people dream about being entrepreneurs. They may begin by doing something they love, and then they start getting paid for it! It’s easy to enjoy your success and overlook the need to take your business to the next level. When you organize your business into an official entity, you give it legitimacy. People start to look at you differently. You’re now a “real” businessperson, and people treat you differently.
So, what sort of entity should you become? You need to understand the options that are available to you. People use the term “incorporation” as a sort-of catch-all for different business structures. These include (i) corporations, (ii) limited liability companies (LLCs), (iii) S-corporations, (iv) C-corporations, (v) non-profit entities, (vi) partnerships, and (vii) etc.
You should research each potential entity and understand the tax rules for each. See some our other blogs that describe the various entities. For each type of entity, before you can make an intelligent decision, you need to know the implications from a legal and tax-liability standpoint. After choosing a type of business entity, you may realize it isn’t a good fit. That’s okay. You can change the structure of your entity anytime.
Continue reading for six reasons why you should organize your business as a state-recognized entity, such as a corporation, limited liability company, or one of the other structures available.
- You Can Get a Business Bank Account
If you’re operating a small business that is not incorporated or otherwise organized, you may inadvertently co-mingle business funds with personal funds. This is never advisable. It is okay if you’re keeping good records. But it can be tricky at tax time if you can’t distinguish between personal and business expenses.
In Michigan, banks generally won’t let you open a business-bank account unless your business is incorporated or organized in some manner. Also, it can be helpful down the road if you build a business relationship with a bank. If you need to get a loan to cover emergency expenses or fund an expansion, or whatever, you have already established a financial relationship with a bank.
Then, as an incorporated business with a bank account, you can sign up for online-accounting programs such as Quickbooks. This allows your business to manage reports and prepare for tax reporting.
Finally, having a bank account also eases the process and costs of accepting ACH and credit-card payments.
- Gain Access to Small-Business Loans
It’s no secret that 30% of new businesses fail within 2 years after opening. One of the top reasons is a lack of access to cash. A good reason to incorporate or otherwise organize your business is that it provides you with a better opportunity to obtain a line-of-credit.
Companies who don’t have their affairs in order generally cannot qualify for a small-business loan. When you apply for a loan, you have to provide the bank with an entire list of documents. These include business-banking records, profit-and-loss statements, and business plans.
It’s also important to maintain a good personal-credit score. Your personal-credit rating plays a large part in the approval process.
Don’t let your business fail to thrive or keep its doors open because you never organized it into an organized entity. Reap the benefits of your hard work.
- There are Tax Benefits for an Incorporated Business
Businesses get taxed on their profits. You can reduce your tax liability by deducting your business expenses. These cover a wide range of items. Office supplies, rent, travel expenses, and utilities are all deductible expenses.
An incorporated business with employees can also deduct their salaries, insurance, and other benefits. You will also have the option of delaying your own income opposed to claiming all after-expense revenue for yourself.
If you’re not comfortable doing your own taxes, you should hire a Certified Public Accountant (CPA). This person should have the expertise to get you the best deductions for your business.
- Incorporation Legitimizes Your Business
Operating a business that has been incorporated lends legitimacy to your product or services. A business appears more credible to people if they have an Inc. or LLC attached to their name. Associations and trade groups for your industry may also require that you are an established business entity.
Adding Inc. or LLC to your name can also help build relationships with vendors and suppliers. This makes them more likely to grant you credit, and you will not have to pay in full when you order supplies.
If you need to rent office space or open a storefront, you’ll most likely need to organize your business. This will also get you recognized by the local Chamber of Commerce, which brings its own added benefits.
- You Can Protect Your Personal Assets If Sued
Don’t get caught up in a situation that can cost you everything. Being incorporated provides protection of personal assets if you are ever sued. Corporations and limited liability companies can separate the organizers’ personal property from their business assets, and creditors of your business cannot take your personal assets. They can still take any of the company’s assets to cover such debts, but your assets are protected.
Without this protection, you can lose everything, including your home, car, and other possessions.
You really should have an attorney structure your business to ensure that you protect your wealth — before you face litigation.
- Protection for Your Brand
After you have become incorporated, give serious consideration to protecting your brand. You can do this by filing for a Trademark.
Some business owners believe that organizing an entity is all they need to protect their name. Yes, it prevents others within Michigan from duplicating your business name. However, it doesn’t stop someone outside of Michigan from infringing on your brand.
Registering a Trademark is an expense that some small businesses feel that they cannot afford. But if you’re considering longevity (or franchising), you want to make the investment to protect what you have built.
On the flip side, you don’t want to one day learn that you have infringed on someone else’s intellectual property. Rebranding costs more than the fees associated with getting a Trademark.
Incorporation Is Essential
Getting your business affairs in order is critically important. An incorporated business can reap many benefits, and as an owner, you owe it to yourself to have everything in order.
If you have any questions, feel free to call George Law 24/7 at (248) 470-4300. We have experienced attorneys waiting to answer your questions,