When starting a company, entrepreneurs have many decisions to make. One of the most important choices involves selecting the right type of business entity. There are myriad options. While some business owners will operate as sole proprietors or form partnerships, others will opt for limited liability companies or corporations.
There are pros and cons to each of these business types, so it is important to get legal advice from an experienced and reputable startup attorney in Los Angeles such as Afshin Hakim of Hakim Law Group in order to make the right choice.
Incorporation has many benefits for new businesses, and three of the top reasons why this type of business structure should be considered include the following:
Incorporation provides protection from liability
Sole proprietors and partners may be held legally responsible for business debts. If a company is successfully sued, sole proprietors and partners could lose personal assets to satisfy the judgment against the business. Sole proprietorships and partnerships thus present a significant risk to personal wealth. Incorporation removes that risk. As long as corporate formalities are maintained, losses are limited for owners of a corporation or a limited liability company. An owner of a corporation or limited liability company can only lose the amount invested in the business.
Incorporation can provide tax flexibility
When incorporating, entrepreneurs can opt to organize their startup as a limited liability company, a C-corporation, or an S-corporation. If a company is structured as an S-corporation or as a limited liability company, gains and losses may be declared on an individual owner’s tax return.
Owners who operate an S-corporation and who draw a salary will also have flexibility in how much of their income is classified as wage income and how much is classified as a distribution of profits. No Social Security or Medicare taxes are paid on distributions. This can result in significant tax savings.
C-corporations do not allow for pass-through taxation. A c-corporation must declare corporate income and pay taxes. When profits are distributed to owners, the owner must also declare this income. This means double taxation is a possibility for C-corporations.
Incorporation makes business succession issues easier :
When a company is incorporated, each owner has shares in the company. Depending upon the rules set forth in the Articles of Incorporation, and in any contractual agreements between shareholders, it may be possible for those shares to be sold or transferred at will by the owners.
Because the corporation exists as a separate legal entity from its owners, and because ownership shares are transferrable, the company can change hands without changing form or structure. A corporation can survive its owners, and can last for much longer than a human lifetime.
For further information or to schedule an appointment with Afshin Hakim for legal assistance about how to incorporate your startup the right way please contact Hakim Law Group at 310.993.2203 or visit www.HakimLawGroup.com.