New Business Incorporation – A Primer for Startups and Small Businesses

The first question that you should contemplate before rushing on to get your business incorporated is – have you done your homework?Getting a business incorporated is no biggie, but if you have not done your background research right, this ‘not-so-biggie’ issue will soon flourish into one big costly legal hassle. Most startups looking to get their business incorporated face trouble while choosing the business structure or right legal form for their business. While getting a business incorporated, choosing the right legal structure is essential. To decide the best form for incorporation, businesses should first consider the associated liability issues of the company and the tax structure of each business form. The kind of legal form you choose for the company has a bearing on your personal risk in association with the business and also your potential for financial returns. When in doubt, it is always best to seek corporate advisory services from corporate law firms that will not only help in deciding the right legal form but will also handle the formalities associated with incorporation.

While considering options for incorporation, one of the essential factors one needs to consider is business asset appreciation. Whether or not the business assets will increase in value over time (appreciate) is a determining factor. If a business has assets that are appreciable, it is preferable for it to be a limited liability company (LLC). This is because, in case of an LLC, the assets of the business are considered as personal assets and there is no distribution required upon termination of the business. There is no tax obligation unless the assets are actually sold. Liability protection is another factor that companies need to consider while getting their business incorporated. Some legal forms of businesses offer liability protection while others don’t. If the type of incorporation you choose does not consider your business as a separate legal entity from you, then your personal assets will also be considered as being a part of the business and if your business is sued for some reason, your personal assets would be at stake. In case of partnerships, your personal assets might also be at stake for the actions taken by your partner. It is therefore critical to assess any liabilities one may have.

Another aspect worth considering for company incorporation is the retention of the firm’s earnings. The legal form that the company takes dictates the tax structure that the company will have to conform to. Some legal forms may enjoy certain tax benefits that others may not. It is more judicious to find out the tax differences between the various legal forms of firms to make the right choice with respect to the company’s earnings.

Rather than meddling with corporate legal issues, it is always better to do your homework before filing incorporation applications. Most startups fail to realize this and end up in losses arising from penalties and legal litigations. Even before getting your business incorporated, it is essential to question whether incorporation is actually right for your business. Another point to consider is that whatever legal form you choose to take for your business, you can always change that later as your business grows. For instance, most small businesses begin as sole proprietorships, in which a single individual owns and manages the business and is personally liable for business-associated obligations and debts. Some others start their business as a partnership with two or more owners and managers of the business. Later on, as the business expands, these businesses are incorporated formally as limited liability companies, etc. in order to arrange for protection against liability risks, for securing the business entity and for taking advantage of the tax benefits associated with incorporation. Incorporation in a way offers tax and legal protection to business owners and thus, its importance and sensitivity cannot be underestimated.