There are many advantages to incorporating your business and assets by using the proper business entity. In fact, without it, you’ll have difficulty building business credit, which is often necessary for growth and stability. You’ll also be vulnerable to losing your wealth and assets in the event of lawsuit, divorce and legal judgements.
Corporations, limited liability companies (LLCs) and limited partnerships (LPs) are business entities that allow you to:
1. Keep Your Businesses and Personal Assets Separate
This can protect personal assets such as your home and bank account from claims against the business. This is far superior to using a sole proprietorship or general partnership, which again offer no asset protection.
2. Create Separate Entities for Greater Asset Protection
Some business owners create more than one corporate entity and segregate assets among different business entities for asset protection. This can lower each asset’s exposure to claims.
3. Build Business Credit
You won’t get far using a sole proprietorship for business credit-building purposes. You need a separately chartered and active (meaning all state fees are paid) business entity for this purpose. Read more about building business credit fast. It’s also worth knowing if you are likely to need business credit, as some industries will have a greater need for it.
4. Lower Audit Rates
Sole proprietorships are audited at a rate five times higher than corporations!
5. Enjoy Tax Benefits
There are also many tax benefits to using a corporation, LLC or LP. Many business expenses are easily written off and pre-tax dollars can be used for valuable benefits packages.
6. Make More Money
An Experian study found that incorporated business owners had incomes 35% higher than the overall population. Comparatively, unincorporated owners’ incomes are 24% higher. Additionally, the Experian study cited that Incorporated business owners are 94% more likely to exhibit “work hard, play hard” attitudes than unincorporated owners and the overall population.
My book, Start Your Own Corporation, discusses choosing the right entity in great detail.
