If you're planning to start a new business, the first thing you want to do is talk to an attorney about forming a corporation. Even if you don't have any assets or cash flow, a corporation could be needed to protect your personal finances. Each situation is different, so a thorough understanding of how a corporation works and how you set one up is important to know in advance. Here is a quick look a few important reasons to consider forming a corporation.
To Protect Your Personal Finances And Assets
A corporation becomes a separate entity. It has its own bank account, credit report, and assets. If the corporation goes bankrupt, it won't affect your personal credit. If the corporation is involved in a lawsuit, it might lose its assets and money, but the creditors can't touch your personal finances. This protection is the main reason for forming a corporation.
So You Can Sell Or Transfer The Company
Inheriting, selling, and transferring a corporation is possible, whereas if you're the sole owner, the business dies along with you when you pass away. Your heirs can inherit the assets of the company, but if they want the company itself and it isn't incorporated, they'll have to start over as if the company is new. If you want your heirs to be able to step in and continue running the company you built, then you should probably form a corporation. You'll also be able to sell your share of the business if you decide to leave or retire and the company can continue without interruption. If you want to build a company to sell it later for a profit, then incorporating at the beginning is probably the best plan.
When You Want To Raise Money More Easily
A corporation can raise capital more easily too. Banks may prefer to loan money to a business that is properly incorporated. You can also sell shares of your stock to raise money. In addition, your corporation will have tax advantages you would miss out on otherwise that can benefit it financially.
While there are good reasons to establish a corporation when you start a business, you want to understand all of your options and know what you're getting into and how a corporation works. Get legal advice before you make your decision so your business gets off to the right start. Forming a corporation usually isn't an expensive process, especially when your business is small and new. If incorporating is suitable for you, the cost and process is worth it to protect your personal finances and to establish a business entity separate from you.