Category: California Business Law

incorporating a business

Why Incorporate?

If you are thinking about starting a business, someone almost certainly suggested that you incorporate your business, probably as an S Corporation or LLC. However, it’s unlikely they told you why. Corporations are not for everyone, but they do have a lot of advantages. Let me go over some:

  1. LIMITED LIABILITY: This is the most important thing that a corporation provides – peace of mind. Limited liability means that the debts and obligations of the corporation are separate from your personal property. So, for example, if your business is sued or owes money, the corporate form protects your house from your creditors. This is a great way to minimize the risk of starting a business.
  2. TAX ADVANTAGES: Many unincorporated businesses have heard their CPA complain that they can’t take advantage of all of their deductions unless they incorporate. This is true – all corporate forms allow tax return preparers to properly deduct more expenses. Another potential tax saving is for people with multiple streams of income. In some cases, by organizing each stream of income into its own corporation, they can take advantage of certain parts of the tax code to reduce their overall tax burden.
  3. MONEY: Lenders like to see professional, properly run businesses. When you incorporate, they take you more seriously and are willing to lend more money.
  4. PROFESSIONAL: Clients, like lenders, like to see a professional business at the other side of their transactions. Incorporating makes you look more serious and more reliable and can help you close deals. Some larger businesses may require you to be incorporated to do business with you.
  5. INDEPENDENT CONTRACTORS: After California passed the infamous AB5 law, everyone is afraid of inadvertently turning a regular business transaction into having brought on a new employee. While having a corporation is not the only factor that determines your employment status, it is an important one. Legitimate consultants and contractors of any kind should seriously consider incorporating to avoid this problem.
  6. ANONYMITY: A corporation allows you to sign deals and checks with your corporate name, not your personal name. While your name is likely to be in some public records with any corporation, it’s not often that people will look it up. If you want to reduce your personal public exposure, a corporation will help you do that.

While those are the pros to incorporating there’s really only one con: it costs money. You will typically have to pay someone to incorporate your business for you. And then there will be a $800 (sometimes more) yearly fee to the state for S Corps and LLCs. You will have to hold at least one corporate meeting each year and maintain the minutes of that meeting.

Weigh these pros and cons when making your decision on whether to incorporate your business.

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