While the affordability and the simplicity of running your business as a sole proprietorship may provide an array of attractive advantages, there are several reasons you may benefit more if you were to form an LLC or corporation. Doing so may provide certain benefits depending on what state you live in. For example, if you live a Texas, and operate as a sole prop, forming a Texas LLC or corporation may offer specific, exclusive benefits.
The question is – how do you know it is time to make this change? The good news is, you don’t have to guess about this. There are several indications that let you know you should rethink your current sole proprietor status and that it’s time for you to take the steps to set your business up under a more formal business structure. Those signs are found here.
You Want to be Taken More Seriously
The mere visual of having “Inc.” or “LLC” after the name of your business helps to give it more clout in the eyes of partners, vendors and even customers. Even though the letters aren’t a reliable measure of the competency or capabilities of the business, perception is a factor that can often make or break many business deals.
Do you really want to demonstrate to others that you are completely serious about your business and that you’re in it for the long haul? If so, you should think about formally registering it as a corporation or an LLC.
You Want More Liability Protection
When you file your business status as a sole proprietorship, then you and the business are considered to be the same entity. This means that if you are unable to pay down your business debt, or if someone sues your business, your personal assets (like your house and savings) are at serious risk.
When you form an LLC or corporation, the business then becomes its very own legal entity that is separate from your person. This means that your personal property is completely protected if your company runs into any type of financial or legal issues.
You Want More Flexibility Regarding Taxes
If there is no separation between you and your business, then you need to report all business income on your personal tax return. This means that all the profits your business earns are subject to the self-employment taxes.
However, if you opt to form an LLC or a corporation, you may be able to reduce your self-employment tax obligations. This is especially true if you opt to create an S Corp. With this formation, you will only pay the self-employment taxes on your salaries and wages, instead of on all of the business profits.
There are other advantages that go along with incorporating, as well. You can deduct medical insurance and have the ability to keep more of the profits from your business.
You Require Secure Funding
Investors and lending institutions often require that your business be set up as a formal business structure, instead of as a sole proprietorship prior to lending any money. If you want to expand and grow your business, you will need funding to do so. As a result, it will be necessary to have your business changed to an LLC or a corporation before receiving the funding.
While the process of setting up an LLC or a corporation is much more involved than a sole proprietorship, it will be well-worth it in the long run. The fact is, this is time well-spent when you consider that it gives your business all the advantages related to personal liability protection, more credibility and the tax treatment options. If you aren’t aware of how to properly fill out the proper forms, then working with the professionals may be a smart move, as they can help significantly.