Why Should You Adopt a Formal Structure for Your Business?

June 2, 2014
Added credibility and tax savings are just a few of the many perks to adding "Inc." to your company's name.

Added credibility and tax savings are just a few of the many perks to adding “Inc.” to your company’s name.

Much like a wide array of sweet ice cream flavors, there are various kinds of business structures that are available to entrepreneurs. These include a basic sole proprietorship or partnership, a C corporation, an S corporation, and an LLC. There are many great benefits to adopting a formal structure for a company. Here’s why:

– It gives your small business added credibility.

The most basic aspect of changing from an informal business structure to a more formal entity is to give your small business the credibility it truly deserves. If you only function as a DBA, you likely do not have “Inc.” or “LLC” in the name of your company. In order to get this, you should adopt a formal structure that will be more attractive to others, including potential investors, partners, customers, and even future employees. Major corporations out there have their current structures for a reason. To have a similar setup, changing from a sole proprietorship or partnership to something more formal certainly has its benefits in the credibility arena.

– It can help reduce how much you owe the IRS each year.

Entrepreneurs who work as sole proprietors or in partnerships tend to be on the hook for some of the highest IRS tax rates going. When you take on the structure of a business entity like a corporation or LLC, you can reduce how much you pay in taxes, and you can have your business taxed separately rather than being taxed on your business activities through your personal tax obligations. All small business owners want to keep more of the money they work hard to make, and this can be done by having a formal business entity.

– It can offer an added layer of protection, especially for your personal assets.

In addition to IRS tax savings, adopting a formal structure for your small business can also provide added liability protection for your personal assets. A sole proprietorship exposes what you personally own – such as your vehicle or home – to creditors, lawyers, and others who could potentially pose a threat to your business. With that said, having the protection of a separate business entity can help put a shield up between your business activities and personal doings.

– It can lead to future opportunities.

Moving from one business type to another can offer you the opportunity to take advantage of additional perks as well. This includes changing from an informal structure to a formal one or from one formal arrangement to another formal one. Going from a sole proprietorship to a corporation gives you chances for more flexibility and tax deductions. Transitioning from an LLC to a corporation or vice versa can even be an appropriate decision in some cases. Be sure to analyze all of your options and find the best one that fits your specific situation.

– It can help jumpstart your business.

Completely revamping a small business is often necessary due to a variety of reasons. If you change what you sell, it could be beneficial to move to a different type of entity structure. If you want to become more formal and have others take you more seriously, it could help as well. Any big change within a company could require a change in how your business is assembled from a legal and tax standpoint. Proceed with caution so that you make a smart decision for yourself and your company before making any major changes.

1-800Accountant, the nation’s leading accounting and consulting firm for small businesses, can assist you with all of your entity formation and business accounting needs. To learn more, call 1-888-749-0117 or visit www.1-800Accountant.

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