Whether your business is your sole source of income or whether it is something you do on the side, you should form a business entity to protect you. The protections afforded by the corporations and limited liability act are some of the cheapest protection you can buy to safeguard you and your family from personal liability.
The main reason (which is why it is listed first) for forming a business is to limit the liability of the owners. If you operate as a sole proprietorship or a partnership, any debtors of the owners can go after assets in the business to satisfy personal debts. Corporations and limited liability companies that are properly formed and operated, which includes separation of personal and business assets, can protect the business from such personal debts.
2. Perpetual Existence
So long as a corporation complies with state laws, a corporation theoretically can exist forever. In New Jersey, businesses that fail to file their annual report for two years will be revoked. A limited liability company formed in New Jersey also theoretically exists forever, unless the operating agreement states otherwise.
Perpetual existence allows the business to continue operating if one of the owners dies. The decedent’s heirs only inherit stock in the business and not the assets or partial control of the business, which could force the business to close.
Limited liability companies and corporations, unlike partnerships, are owned by shareholders or stockholders. The LLC or corporation issues shares to those who own the business. The number of shares determines the percentages of ownership among the owners.
Under the terms of the operating agreement or bylaws of the business, the shares of stock may be transferred to new owners, devised to heirs, or become part of the principal in a trust. Neither a sole proprietorship nor a partnership has this kind of freedom.
4. Separate Records and Credit Ratings
It is highly recommended that business owners do not mix business and personal assets. Businesses with shareholders or stockholders are generally required to keep separate banking and accounting records.
Depending on your form of business, these separate records create separate credit ratings for the business and for the individuals who own it. Corporations are completely separate entities from the individual shareholders. This separation allows the corporation to declare bankruptcy without harming the shareholders. Conversely, one shareholder might have a bad credit rating and this will not negatively impact the corporation.
5. Tax Benefits
There can be significant tax benefits to forming a business, from being able to deduct any losses you incur in running business, to deducting a portion of your home expenses if you work from home. (Speak to a tax planning professional before attempting to do so.)
6. Estate Planning
If you have formed a legacy business, one that you intend to pass on to your children, shares of corporations and limited liability companies can be devised in wills or made part of the principle in trusts to your heirs or beneficiaries.
Which sounds better: Jane Doe d.b.a. Jane Doe Designs or Jane Doe Designs, LLC? You only get one chance to make a first impression and that impression can determine whether you make a sale. Doesn’t it sound better to be Jane Doe Designs, LLC? For a relatively small fee, you can take your small crafting side business and turn it into something that sounds impressive and creates a sense of trust in your customers. You can take your business to the next level.
These are only a few of the benefits of using a business entity rather than operating under your name. Formation of your entity is the easiest, and least expensive, way to protect yourself and it is a way to distinguish yourself from your competition.