Why Should I Incorporate My Business?

“Why should I incorporate my business?”

If you are operating a small business as a sole proprietor or in partnership, you should consider forming a corporation or limited-liability company.  The reasons to take that step include: (1) Personal asset protection.  Conducting business as a sole proprietor or in partnership exposes your personal assets to business creditors or to claims by third parties arising from business operations.  A properly formed and managed corporation or limited-liability company allows you to isolate business liabilities from your personal assets;  (2) Tax flexibility.  Depending on the business and your circumstances, forming a corporation or limited-liability company may increase flexibility for tax planning purposes;  (3) Business credibility.  Those interfacing with your business may find your operations more credible if you conduct business as a corporation or limited-liability company instead of in your own name or as a dba registered in your own name; and  (4) Brand protection and perpetual existence/marketability.  Forming a separate business entity and conducting business in that form will, over time, help you develop a recognized brand, help you ensure the perpetual existence of your company and, when the time comes, assist you in selling the business and its assets.

“If I form a corporation or limited-liability company, won’t I face double taxation?”

No.  A small-business corporation (so-called “S-Corp.”) and most limited-liabilities companies are structed as pass-through entities for tax purposes.  That means the business entity does not pay taxes and taxes are, instead, paid by the corporate shareholders or limited-liability company members.

“My personal assets are already held in a revocable living trust.  That means those assets are protected from business creditors and claims by third parties arising from business operations, right?”

No.  A revocable living trust (family living trust) is an excellent mechanism for efficient estate planning and can help you avoid Probate Court.  A revocable living trust does not, however, provide any protection for your personal assets or those assets held in the revocable living trust.  For example, if you run a small business that leases residential rental properties that are held in your revocable living trust, those residential rental properties receive no protection from creditors of the business or claims by third parties arising from business operations.

“If I incorporate my business or form a new limited-liability company, won’t I have to spend all my time managing the ‘corporate formalities’ for the entity?

No.  A small business corporation (“S-Corp.”) organized as a statutory close corporation is intended to simplify the ability to manage corporate formalities and, under the right circumstances, can even dispense with formalities (such as annual shareholder meetings) by agreement between the shareholders.  Similarly, a limited-liability company is intended to maximize flexibility and simplicity in the management of the business formalities while maintaining the separate legal characteristics that shield business liabilities from creditors and claims by third parties arising from business operations.

“How long does it take to form a new corporation or limited liability company?”

While processing times for filings with the California Secretary of State’s offices were slowed due to COVID-19 precautions, 24-hour expedited processing was reinstated effective June 1, 2020.  As such, it is feasible to form a new corporation or limited-liability company within about two weeks, or faster by paying rush charges.  We expect non-expedited processing times to slowly improve and, at some point, for the Secretary of State’s offices to resume its practice of offering multiple options for expedited processing times.

If you would like to discuss these issues, please give us a call.

 

 

Michael Stump is a Partner at the Bakersfield office of Borton Petrini, LLP.

 

 

 

Legal Disclaimer: Please be informed that legislation and laws are rapidly developing in response to the COVID-19 pandemic.  Therefore, the legal analysis that is being provided is based on the analysis of the current legislation and current agency guidance, as it stands at this moment.  Additional legislation and/or changes to current legislation may impact the information being given herein.  This article is designed for general information only. The information presented should not be construed to be formal legal advice, nor the formation of a lawyer/client relationship.