For many people, owning a small business is their part of the American dream. If you are one of those people, and you have finally decided to pursue that dream, you will have a number of important decisions to make before your business gets off the ground. One of the first questions you will likely ask yourself when starting a business is “ Should I incorporate? ” Deciding which legal structure to choose for your business is one of the most important decisions you will make along the road to becoming an entrepreneur. Ultimately, only you can decide whether incorporation is best for your business; however, understanding a little more about the benefits and drawbacks to incorporating your business may help you make your decision.
Legal Structures for Your Business – Your Options
There are three basic business structures from which you can choose when starting a business. There are also a number of hybrids and sub-categories such as LLC’s and LLP’s; however, when deciding on a business structure for our business it is best to consider the basic three. The first is a sole proprietorship. If you own and operate a business by yourself, and you do nothing about choosing a legal structure for your business, you will automatically be considered a sole proprietor. The second option is a partnership. A partnership is when two or more individuals operate a business and share in the profits of that business. A partnership does not require the creation of any legal documents; however, you can execute a Partnership Agreement if you choose to for your business. Both sole proprietorships and partnerships are taxed at the individual level, meaning that profits and losses are reported on the owner’s personal tax return. The third option is a corporation. A corporation is the most formal of the three options, requiring the creation of Articles of Incorporation. In addition, a corporation is legally owned by the shareholders and managed by a Board of Directors. Unlike a sole proprietorship and a partnership, a corporation is taxed twice – once at the corporate level and again at the shareholder level.
Should I Incorporate? — The Benefits of Incorporation
One of the major drawbacks to choosing a corporation for your business structure is the double taxation aspect; however, there are also a number of benefits to running a corporation, such as:
- Avoiding personal liability – when you operate a sole proprietorship or partnership you risk being liable for the debt or liabilities of the business. One of the biggest benefits to incorporation, however, is that you avoid personal liability for the business’s debts and liabilities. To enjoy this particular benefit of incorporation though, the business must be a real corporation. If the incorporation is in name only you risk a creditor “piercing the corporate veil” and accessing your personal assets.
- Credibility and attractive to investors – customers and clients automatically attribute more credibility to a business when it has “inc.” after the company name. In addition, investors often find a corporation to be a more attractive option for investing purposes which can be important down the road if you wish to expand your business.
- Perpetual existence – because of the formal organization of a corporation and the fact that it is actually run by a Board of Directors, a corporation is the one business structure option that will automatically continue to exist even if something happens to you.
Consulting with Professionals
The best thing you can do for you and or your future business prospects is to consult with an experienced business planning attorney as well as with your financial planner before you make a decision which type of legal structure is right for you and your business. Getting a small business off the ground is a difficult prospect under the best of circumstances – but well worth it if your business is a success.
For more information, please join us for an upcoming FREE seminar. If you have additional questions about choosing the right business structure for your small business, contact the experienced North Dakota and Minnesota estate planning attorneys at German Law by calling 701-738-0060 to schedule an appointment.