TOP TEN REASONS TO FORM A BUSINESS ENTITY

 

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  1. PERSONAL LIABILITY ISSUES-Forming a corporation, LLP, or LLC may shield you from other people being able to reach in and attach/sell or dispose of your personal assets, such as your home, personal bank accounts and other financial assets. In order to get this protection, however, you must observe the corporate, LLC or LLP formalities (i.e. hold meetings, draft resolutions on important decisions, not commingle personal and business assets, etc.).

  1. LEGAL REQUIREMENTS– if someone wants to have an entity, their profession may determine what type of entity they have. For example, in California attorneys cannot be LLCs, but must be a sole proprietor, a Professional Corporation, or an LLP.  Medical professions must be a Medical or Dental Corporation, etc.
  1. TAX ISSUES– C corporations, S corporations, LLPs and LLCs have different tax advantages than a sole proprietorship.
  1. ABILITY TO BUY/EXPENSE OR DEPRECIATE ASSETS YOU MIGHT NORMALLY USE. Example, if you buy a car or computer for yourself, that is just money you have spent.  If you use the car predominantly for business, you can have your corporation buy the car, and you can depreciate the asset over time.  The effect of depreciating the asset offsets income from the corporation, LLP or LLC thus saving you tax dollars.
  1. RETIREMENT/PENSION PLAN OPTIONS– These options are greater for various types of business entities than for sole proprietors.
  1. HEALTH CARE OPTIONS– If you are a corporation, LLC or LLP, you can make your spouse an employee and enjoy the benefits of guaranteed-issue group health insurance than if you are a sole proprietor. You need to have two or more people in the business to take advantage of this.
  1. YOU CAN APPEAR BIGGER THAN YOU ARE– If you want people to take you seriously, depending on the type of business you are in, incorporating makes you appear bigger to the outside world. Some businesses will only contract with either corporations, LLPs, or LLCs.
  1. GIVES A FORMAL LEGAL STRUCTURE TO MULTI-PARTY ORGANIZATIONS. Many people who have general partnerships do not take the time to prepare a formal agreement that memorializes the duties of all parties and how to buy and sell ownership interests when one wants to leave the organization.  With a corporation, LLC or LLP you must submit articles that define the organization and you must have an operating agreement, limited partnership agreement or bylaws that govern how the company will run.
  1. EASE OF RAISING CAPITAL. A corporation, LLC or LLP can simply sell stock, membership shares or partnership shares to raise money. These shareholders or members are not necessarily going to have any say in the company’s day to day affairs, but split the profits and/or dividends on a predetermined basis.
  1. PERPETUAL LIFE. With a corporation, LLC or LLP, you can have the company continue to stay in business after the original owner dies, becomes incapacitated or sells his/her share.  For example, when founder and CEO Don Fisher passed away, the GAP Corporation continued to be a viable business.  This is not true for a sole proprietorship or for a general partnership.

 

 

Need help choosing a business entity for your company? Nancy Lewellen can help you do this with ease, and works with your financial advisor to minimize your taxes. Contact her today at nyl@palladianlawgroup.com or 415-399-0993 for a free 15-minute consultation.

 

 

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