In 2013, there were 28.8 million of these in the United States. Of that figure, 406,000 represented a portion of them. No, these figures do not refer to the number of immigrants to the US that year. Instead, according to the Whether a business endeavor is in its infancy or been around for a while, it’s wise to know which legal entity might benefit your endeavor, says attorney Josh Hollingsworth.
According to Hollingsworth, a partner with the Indianapolis office of Barnes & Thornburg, there are numerous benefits to formalizing one’s business endeavor. Still, that doesn’t mean incorporating is right for everyone. However, what is important is to make an informed decision not only about whether incorporating is right for your entity and if it is, which flavor of corporation is best.
Types of legal entities
Several types of legal entities exist. They are:
- Sole proprietorship: one person-owned endeavor that is technically not a separate legal entity from the individual. It can operate under an assumed name (a DBA)
- Corporation: Either S or C corporation. The only difference has to do with how the business is taxed. A “C corp” is taxed as a legal entity separate from the individual, so there is double taxation. In an “S corp,” the corporation is not a separate taxpayer. Owners pay their share of taxes on the income generated by the corporation. An S corp is also known as “Pass through Entity.” If the corporation earns $1, the corporation does not pay tax on that dollar. Instead, the company reports that income to its shareholders who are then taxed on it.
- Three types of partnerships: General, limited and limited liability
- Limited liability corporation: An LLC is a hybrid of a corporation and a partnership
Formalizing a legal entity by incorporating in some way provides at least one important benefit. According to Hollingsworth, forming a separate legal entity limits personal liability for corporate matters.
In other words, “Your liability is limited to the amount of capital invested in the business. That means your personal assets are not subject to judgment,” he says.
That is, of course, assuming the company owner has not co-mingled personal funds with those of the legal entity. To prevent that, Hollingsworth suggests the incorporator do two things: open and maintain a banking portfolio for the business separate from their personal accounts and operate them separately from one another.
According to Incorporate.com, there are five other reasons to incorporate. They are:
- Tax flexibility and incorporation tax benefits
- Enhanced credibility
- Brand protection
- Perpetual existence
- Deductible expenses
Tami Kamin Meyer is an Ohio attorney and writer. She tweets as @girlwithapen.
