Should I Incorporate my Business?

April 3, 2012

So you've take the plunge. You've started your own business. Perhaps you've gone the traditional route and purchased or leased a Sacramento-area storefront. Or perhaps you've capitalized on the infinite merchant opportunities that the internet provides. Perhaps your side source of income has grown into a full-time gig.

No matter the case, the prudent, established Sacramento business owner knows that entity formation is in his or her business's best interest. But perhaps your business is in its infancy. Perhaps you are not yet established among Sacramento consumers. Perhaps you are unsure if you should incorporate your California business. An experienced Sacramento business entity lawyer can help you determine whether your business is a candidate for incorporation.

The Advantages of Business Entity Formation

The advantages of forming a business entity are numerous.

First and foremost, incorporating your business adds instant legitimacy in the eyes of your consumers, vendors, and business partners. An incorporated business is more likely to secure a commercial mortgage loan - and at a better interest rate - than an unincorporated business. Products and services from an incorporated business carry with them an implicit quality that products and services from an unincorporated business do not. Anyone can sell produce from the back of a pickup truck and makes some money on the side. But the reality is that today's modern consumers are more likely to purchase produce from "Mom and Pop's Produce Market, Inc." because the full legal entity title implies structure and legitimacy.

Incorporating under such a name also prevents another merchant from operating under the same name, protecting your business's profitability by ensuring name and brand recognition in the market.

Another primary reason to incorporate is to separate one's personal assets from the assets of the business. The main implication of this separation appears on the business owner's income taxes. Suppose your business brings in gross receipts totaling $100,000 in a year. But suppose it cost you $60,000 to maintain your business's daily operations over the course of the year. If your business is an incorporated entity, you can deduct the business expenses, such as rent, mortgage, employee wages, and energy bills before allocating income to the owner. In this example, the business owner pays income taxes on the $40,000 paid from his business rather than on the $100,000 in gross receipts. Your business does not evade taxes altogether, but generally small businesses are taxed at vastly different rates than personal income.

In the same vein, there are legal liability advantages to the separation of one's personal assets from business assets. Suppose a negligent employee drops a banana peel on floor of Mom and Pop's Produce Market. If a customer is injured as a result of slipping on the banana peel, the customer may only sue for assets tied up in the business, and may not sue the business proprietor personally.

This list is by no means exhaustive, but the final advantage worth noting here is that corporate entities exist perpetually, as opposed to sole proprietorships and partnerships that automatically dissolve when one person leaves. The advantage of perpetual existence is that the business entity may exist even when its creator is no longer in the picture. Corporate entities may be bought and sold, or even passed down to one's next of kin.

What options are available to me?

Generally speaking, a business owner may have several options in entity formation. He or she may incorporate under a host of business suffixes, including "Inc.", "LLC", "LP", "LLP", and "PC", among others. There are many considerations that go into deciding which entity type to choose, including the realities of your geographic market. Sacramento business owners should consult a Sacramento business entity attorney, who can help determine which of these entity types are right for your situation.