4 Reasons Marketing Entrepreneurs Should Form A Corporation
Feb 24, 2019 23:25
How long have you been considering forming an official business entity? Months? Years? Are you putting it off because you’re unsure if forming an LLC or a corporation is something you should do?
Hesitation around forming an official business entity is perfectly normal. It can be a significant financial responsibility to maintain a corporation, depending on individual state requirements and whether or not your founders are U.S. citizens. Including filing fees, taxes, bookkeeping, and legal fees, it can cost several thousand dollars per year to maintain a corporation. In California, for example, the yearly, minimum franchise tax is $800, which must be paid even if a business makes no money.
You might be wondering if marketing entrepreneurs, including social media specialists, email experts, and professional SEOs, should incorporate. The answer is that it depends on the current structure of your business.
Some entrepreneurs incorporate only out of a false sense that it will make their company more legitimate. This can be a waste of money. According to one lawyer who forms corporations for a living, “incorporating does little to legitimize a small business. My own business, for example, existed (profitably and happily) as a sole proprietorship from 1997-2005 when I finally incorporated.”
However, there are benefits to incorporation and reasons why taking that step would be good for your business. Don’t incorporate to “legitimize” your business or for tax savings. Incorporate for liability protection and to document a deal with your partners.
Here are three main reasons for marketing professionals to incorporate:
1. You already have a business partner or co-founder
If you’ve got concrete plans to grow your business, and you’ve got a business partner or co-founder, a corporate structure is the best way to define and manage ownership and roles. If you don’t have a business partner and won’t for a while, you’re better off waiting to form a corporation.
You can always form agreements with your business partners and co-founders outside of a corporation, but it won’t provide the same protection. Agreements formed under a corporation will protect your personal assets from your partners as well as the outside world. If you wing it and write up a simple contract without the asset protection of a corporation, you’re gambling with your personal assets like your house and car.
2. You plan to publicly trade shares
A C Corporation is generally better for larger businesses, especially if you plan to publicly trade shares. A C Corporation is more attractive to investors like venture capitalists and shareholders. The C Corp structure allows for a wider ownership of the corporation.
3. You want your business to exist independently of the people who run it
A C Corporation, as explained by Incfile, “[has] a ‘Perpetual Existence’ in contrast to sole proprietorships and partnerships where a business only exists for as long as the proprietors or owners are alive and in the business.”
Unlike other structures, a corporation will remain even if the entire executive team and employees quit or get turned over. That’s why investors are attracted to C Corps. Investing in a C Corp is safer, and they’re more likely to see a return on their money even if the company ends up being sold.
4. You want to protect your personal assets
As stated in the first reason to form a corporation, if you don’t have asset liability, doing business means you’re gambling with your personal assets like your house and car. Say you launch a new product that ends up being defective due to a manufacturer’s defect. Consumers will undoubtedly file lawsuits, and if you’re a sole proprietor, they’ll sue you personally. As a corporation, consumers will only be able to sue the business.
A final word of caution
Forming a corporation is a big responsibility. Be sure to get advice from an experienced CPA before taking on the task. There are several common mistakes people make when forming a corporation like not filing periodic paperwork, and not getting a local business license.
If you’re committed to growing your business, and you have a good reason to incorporate, don’t hesitate to do it. However, don’t be persuaded easily by articles that tell you forming a corporation is a good way to save money on taxes. That might be true for some high earners, but that’s not always the case.
A corporation should be formed to protect your partnership deals, your personal assets, and to create a structure that is more likely to generate the trust of investors.
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