Establishing a Business Entity

By Eric Wert

If you are considering starting a new business, you may be unsure about whether it is worth the effort to take the formal step to create a separate business entity.  Maybe you work as an independent contractor or consultant, or maybe you do part-time freelance work as a side-hustle and want to make sure that you protect yourself.  Even if you are convinced that you should have a separate entity, what type of entity you should choose – a Limited Liability Company or a corporation?

Whatever your situation, deciding to set up a formal business entity may not just be a good idea; it may be the best business decision you ever make.

When you incorporate a business, you are setting it up to operate as a separate entity with legal rights and protections recognized by the state. While businesses aren't legally required to set up a business entity, doing so may have numerous benefits.

Benefit #1 — Liability Protection

Generally, individuals choose to incorporate to limit their personal liability. Even if you're the only employee, incorporation creates a legal wall between your personal and business assets.

When you are operating as a sole proprietorship or partnership, there is no legal separation between the business and the owner.  In those situations, the owners are the business and they are personally responsible for signing any contracts, taking out any loans, and defending any lawsuits. By setting up a separate business entity and managing it properly, your legal exposure may be limited to just your investment into the business itself.

Benefit #2 — Tax Benefit

It is possible you will achieve greater tax benefits and savings by incorporating, although it isn't a guarantee.  In some cases, corporate tax rates are lower than individual tax rates.  In addition, entities often qualify for additional tax benefits and deductions that are not available to individuals.

Benefit #3 — Reputation

Having an incorporated business may add to your credibility. Incorporating or forming an LLC makes it clear to your clients that any work you do for them is being done as a business and is being done professionally. 

Benefit #4 — Funding

Acquiring loans or seeking out investors as a sole proprietor can be a significant challenge. While you may be able to get a loan, it will be a personal loan, not a business one, and it will be your personal credit on the line.

In addition, business entities have more options to provide security to protect investors’ funds than a sole proprietor.  Venture capitalists and other investors often prefer to work with corporations which have the ability to issue various classes of stock to allow them to secure their investment.

Benefit #5 -- Privacy

When you incorporate or form an LLC, you’re creating the ability to have a layer of privacy between the public and your personal life.  You can take action to set up that entity so that it is only the business’s information that is made public rather than your personal information.

Do I choose to create a corporation or an LLC?

Traditionally, entrepreneurs who wanted to avail themselves of the protection of a separate business entity only had one option - a corporation.  Over recent decades, however, states have passed laws to allow businesses to form as Limited Liability Companies (LLCs) instead.

An LLC is a hybrid type of business entity that combines the best parts of corporate protection with the ability to maintain the tax efficiency of a sole proprietorship or partnership.  It is often the best choice for small businesses.  This choice ultimately comes down to many factors specific to your situation.

Do I need an attorney to help formalize my business entity?

While you can set up an LLC or incorporate on your own, the complexity of certain business entities may require the assistance of an attorney.  When you make a decision to incorporate, you can do it yourself without hiring an attorney. But that isn't always the ideal decision. 

As a business owner, deciding which corporate structure fits your needs is important. You can choose to create an LLC as discussed above, or there may be a reason a corporation is best.  In addition, there are different types of corporations (S Corporations vs. traditional C Corporations) that each have benefits depending on your situation.

An attorney can guide you through the process to make the right choice for you.  In addition, the attorney will teach you the ins and outs of how your company will need to operate once incorporated and file the necessary documents. Most importantly, working with a lawyer will ensure that the incorporation documents properly shield you from liability for your business's debts.

Think long-term to set your business up for success.

While incorporating or forming an LLC may not seem to be a big priority when your business is just getting started, it may save you if the business ever gets into trouble. There are costs associated with setting up your business entity, and the tax benefits only apply to some situations, but it is vital that you explore your choices to make the best decision for your business. Be sure to talk to an attorney to review what makes sense for your business.

If you have questions or need assistance with your business, Dischell Bartle Dooley can help. Call us at 215.362.2474.