Monday, June 4, 2012

Why You Need to Incorporate

Having a company means making important decisions for its growth. If you run a company and you are now faced with a decision whether to choose forming an LLC or to incorporate, now is the best time to know more about these business setups.

What is incorporation?

Incorporation is the act of establishing a business identity. When you and your investors go for incorporation, your company can get tax benefits and reduced liability towards debts accrued in business deals. This step can also help you appropriate your firm's value in case you plan to sell it in the future. You also have more choices when it comes to raising more funds, as you can sell shares to the public.

What are the most important aspects?

Limiting personal liability is the most important feature of incorporating a business. You will not be personally liable for any potential debts and obligations incurred by the company. Of course, this does not mean you easily get off the hook if you happen to commit illegal or negligent acts. Overall, however, you get personal property protection, as possible creditors cannot go after your personal assets. Incorporation, in most cases, amounts to securing your future as an individual while engaging in business practices.

What is an LLC?

A limited liability company (LLC) is similar to a corporation in terms of various benefits for taxes. An LLC also protects the shareholders from liabilities incurred under the company's name. One important feature of an LLC is management flexibility. This business setup quickly gained popularity over the years. Today, small-scale businesses often end up forming an LLC to reap its advantages.

How will companies benefit from forming an LLC?

Forming an LLC is also about drawing clear lines between business and personal property. It means creditors can't go after personal properties of members within the LLC setup. There are certain differences. For instance, LLC shareholders are "members". As a member of an LLC, you cannot sell your membership to others unless all members have agreed to this provision before you formed the business. If a member dies or suddenly leaves, all members have the prerogative to dissolve the company.

One benefit of being an LLC member is never having to deal with mandated meetings. Corporations traded publicly may have this requirement, but LLCs do not. This means members within the LLC can hold as much or as little meetings as they wish. There might also be less pressure as government bodies will not be watching what LLCs do all the time. Authorities like the Securities and Exchange Commission (SEC) will not be inspecting finances closely. Auditing is also less tricky for LLCs as this setup does not require annual audits.

So which one is better?

It depends on how you want to look at a long-term business setup. For example, duration and public share offerings are two drawbacks for LLC. This arrangement cannot last forever if members die or leaves. Transferring a member's share might only happen if all members agreed to this beforehand. You also need to realize that incorporation has its limits. While it can last indefinitely, shareholders need to prepare for annual audits and scrutiny from the SEC.

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