Whether your business endeavor is in its infancy or it’s been around for a while, attorney Josh Hollingsworth says it’s wise to know which legal entity is right for your company. According to Hollingsworth, a partner with the Indianapolis office of Barnes & Thornburg, while there are numerous benefits to formalizing one’s business endeavor, incorporating is not imperative for everyone. However, he says, it is wise for most.
Types of legal entities Several flavors of legal entities exist. They are:
Sole proprietorship: one person-owned endeavor that is technically not a separate legal entity from the individual. It can operate under an assumed name (a DBA)
Corporation: Either S or C corporation. The only difference has to do with how the business is taxed. A “C corp” is taxed as a legal entity separate from the individual, so there is double taxation. In an “S corp,” the corporation is not a separate taxpayer. Owners pay their share of taxes on the income generated by the corporation. An S corp is also known as “Pass through Entity.” If the corporation earns $1, the corporation does not pay tax on that dollar. Instead, the company reports that income to its shareholders who are then taxed on it.
Three types of partnerships: General, limited and limited liability
Limited liability corporation: An LLC is a hybrid of a corporation and a partnership
Why incorporate? Formalizing a legal entity by incorporating in some way provides at least one important benefit. According to Hollingsworth, forming a separate legal entity limits personal liability for corporate matters.
In other words, “Your liability is limited to the amount of capital invested in the business. That means your personal assets are not subject to judgment,” he says.
That is, of course, assuming the company owner has not co-mingled their personal funds with those of the legal entity. To prevent that, Hollingsworth suggests the incorporator do two things: open and maintain a banking portfolio for the business separate from their personal accounts and operate them separately from one another.
According to Incorporate.com, there are five other reasons to incorporate. They are: