As an entrepreneur, you’ve clearly got a ton of drive, passion, and determination. You’re committed to your business and your customers. You’re an expert in your products or services. But more than likely, you don’t know much about corporate regulations and company filings. And let’s face it: you didn’t exactly start a business to wade through legal fine print and tax laws.
However, as a business owner, you’ll inevitably need to face pesky questions like ‘Should I Incorporate?’ or ‘Do I need to register a trademark?’ And the sooner you address these legal matters, the better. As an entrepreneur myself, I know that when you’re putting in 80-hour weeks to get product out the door or find new clients, working on legal paperwork isn’t going to be high on your priority list. But getting your legal ducks in a row will help you scale far more smoothly, avoid legal pitfalls in the coming years, and yes, even help you save money on taxes.
Maybe you’re wondering why you need to incorporate your company in the first place. Many entrepreneurs and small businesses consider themselves ‘too small’ to worry about incorporation. After all, having an Inc. after your name means you have a big staff and rows of cubicles, right? Well, actually, that couldn’t be further from the truth.
Even if you’re a self-employed social media consultant or own a family landscaping business, incorporating or forming an LLC can be a smart idea. Here’s why:
- Liability/personal asset protection: Without incorporation, your own personal savings and property are at risk to settle any debts of the business. Once your business is a corporation or LLC, it becomes a separate legal entity. This means that the corporation (and not you) is responsible for all of its debts and liabilities. I know you don’t anticipate angering clients or defaulting on any payments. And most likely, you’ll never encounter this kind of trouble. But things do happen. And a legal business structure gives you peace of mind that your child’s college savings won’t be wiped out by your business venture.
- Tax benefits: In many cases, corporate tax rates are lower than individual tax rates. And corporations and LLCs often qualify for additional tax benefits and deductions that aren’t available to individuals. Of course, specific circumstances vary, and you should consult with a CPA or tax advisor about your own particular tax situation.
So, which business structure is right for you? Well, an LLC (Limited Liability Company) is great for entrepreneurs that want legal protection, but minimal formality, i.e. no exhaustive meeting minutes or addendum filings. The LLC is also the perfect structure for a company that has foreign owners. An S Corporation (or S-Corp) is ideal for those businesses that plan to make a profit soon after incorporation, and distribute that profit back to all the shareholders. A C Corporation (C-Corp) should be used for those businesses that plan to reinvest their profits back into the company or seek funding from a VC.
In addition to business structures, entrepreneurs need to address a few other legal issues, such as:
- Registering your DBAs (“Doing Business As” aka Fictitious Business Name)
- Getting a Federal Tax ID number (also known as an Employer ID Number or EIN)
- Filing for trademark protection for your company name and/or logo
- Educating yourself on employee laws, such as payroll, anti-discrimination laws, OSHA regulations, unemployment insurance, workers’ compensation rules, wage and hour requirements…
- Obtaining business licenses and permits
- Purchasing business insurance
In a series of posts to come, I’ll help guide entrepreneurs through all the legal issues associated with creating and running their business. From a detailed comparison on the differences between an S-Corp and C-Corp to how to protect your business name, I’ll provide tips and information to help you make the right decisions for your business. Stay tuned!
Nellie Akalp is the CEO & Co-Founder of CorpNet, Incorporated, her second incorporation filing service company based on the simple philosophy of truth in business and her strong passion to assist small business owners and entrepreneurs. To learn more about Nellie, view free guides on starting and running a business, receive a special discount, and see how she can help your business get off the ground quickly and affordably, please visit CorpNet here