Incorporating is setting clear legal definition a sensible move for most business owners. Typically, many business owners start their entrepreneurship journey off as a sole proprietorship before considering other business structures. Simply because it is so easy to get started.
If you are a sole proprietor or person looking to get your company off the ground by incorporating your business, then this article is for you. There are many benefits of incorporating your business. We'll show you the top 7 benefits you'll receive from incorporation you'd be able to take advantage of.
Note: If you are a sole proprietor or business owner who needs help managing all of your invoices, taxes, proposals, and contracts in one place, try Bonsai. Our software with editable templates and an expense tracker allows you to easily take care of them. Claim your 14-day free trial today.
A sole proprietorship or unincorporated business carries a lot of risks and disadvantages. An incorporated business protects your personal assets, gets tax advantages and bolsters your credibility. In the next section, we'll explain more in detail why you should incorporate your business. Check out or best states to incorporate resource.
The biggest disadvantage of sole proprietorships is unlimited liability. All this means is that if you are involved in any legal litigation, your personal assets could be sought after.
This is because your business and yourself are treated as one and the same. Any personal liability can be
On the other hand, if you have an incorporated business, your business would be treated as a separate legal entity. This means you'll have limited liability and protection for your personal assets.
Having liability protection is one of the biggest benefits of incorporating your business. It'll give you peace of mind as you conduct business without risking your homes, cars, personal property, or savings.
Shareholders are also not responsible for debts the business incurs. So if your business declares bankruptcy, shareholders would only lose out on however much they invested into the business. The business owner's personal assets will be protected.
Tax time isn't the most pleasant time for entrepreneurs. However, incorporated businesses do have some benefits that can make paying taxes a little less painful. Let's review some of the tax benefits available to you if you incorporate your business.
By incorporating as a C corporation or S Corporation, you'd be able to carry losses forward. Carrying losses forward was introduced by the IRS to allow taxes to be fairer. I'll explain how to take advantage of this in the next section.
This neat little track allows you to lower the taxes for each year so the losses are spread.
For instance, let's say in 2021 you made a profit of $75,000. You'd have a taxable profit of $75,000. However, in 2022, your company lost $75,000, which means you made no profit. The IRS recognized this issue is because their 1-year tax cycle doesn't line up with business cycles. By carrying losses forward, they'd allow you to adjust your tax liability to make your taxes fairer.
In most states, you could carry losses forward for up to the next seven years. Use this little tax hack to lower your tax liability.
Having a separate legal entity also has its tax advantages. For example, your income won't be subject to self-employment tax because you would be able to pay yourself in nontaxable dividends. Since corporations are taxed separately from their owners, they'll pay lower tax rates.
Plus, corporate tax rates are generally lower than personal income tax rates.
Incorporating provincially and federally can be quite a hefty expense. Luckily, a small business owner who incorporates can write off the start-up costs from their tax bill. Depending on what state you live in, you'd be paying around $500 to $1,100 in incorporating costs. A state like California would cost around $1,100 for incorporation.
For any advice on writing off these expenses, you should contact a tax professional.
Note: if you need help managing all of your tax deductions and recording all your receipts or taxes, try Bonsai Tax. Our app will scan your bank/credit card statements to discover all the potential deductions you qualify for. In fact, users save on average $5,600. Try a 14 day free trial today.
Easier access to capital is a huge advantage of an incorporated business. First, if you are looking for a bank loan, many banks would much rather lend or credit money to corporations versus an unincorporated one. If a corporation has business debts, they have many alternative ways for corporations to raise funds and pay off the loans or debt. It is a requirement to perform company incorporation with a bank account separate from personal finances.
Issuing stock to a large number of investors is a very simple way for a company to raise funds. Thousands of stockholders are not unusual in corporations.
As a corporation, it'll be simple for stockholders to transfer ownership. This along with the limited liability make it more charming to outside investors.
Easier access to funds in case your business ever needs it is a key advantage of incorporating vs sole proprietors.
If you would like more credibility as a business owner, incorporating your business is a great way to do so. Companies that incorporate are seen as more professional than a sole proprietorship by suppliers, customers and business associates.
A Federal incorporation identifier added to the business name adds a ton of credibility for businesses.
When you incorporate your business, you'll protect the name of your business, logos, slogans, and the colors that make up your brand. These trademarks help protect your brand and distinguish your business from everyone else.
A corporation is a business structure that continues to exist indefinitely (regardless of what happens to the directors, managers, shareholders, or officers). This is beneficial for investors because it is a safer bet to invest money into a company. Investing in a company, more stable place for investors to put their money and raises the chances that the investors will see a return on their money.
A small business as a sole proprietorship is very risky to invest in. If the owner dies, they business would cease to exist.
A corporation is a separate legal entity from a business owner. Owners do not own its assets directly. Instead, they become shareholders in the corporation. Owning shares means they own the assets. There are many advantages to
This makes transferring ownership interests much easier. This ability to transfer ownership makes it easier to attract investments or raise capital.
A verbal contract (formally called an oral contract) refers to an agreement between two parties that's made —you guessed it— verbally.
Formal contracts, like those between an employee and an employer, are typically written down. However, some professional transactions take place based on verbally agreed terms.
Freelancers are a good example of this. Often, freelancers will take on projects having agreed on the terms and payment via the phone, or an email. Unfortunately, sometimes clients don't pull through on their agreements, and hardworking freelancers can find themselves out of pocket and wondering whether a legal battle is worth all the hassle.
The main differences between written and oral contracts are that the former is signed and documented, whereas the latter is solely attributed to verbal communication.
Verbal contracts are a bit of a gray area for most people unfamiliar with contract law —which is most of us, right?— due to the fact that there's no physical evidence to support the claims made by the implemented parties.
For any contract (written or verbal) to be binding, there are four major elements which need to be in place. The crucial elements of a contract are as follows:
Therefore, an oral agreement has legal validity if all of these elements are present. However, verbal contracts can be difficult to enforce in a court of law. In the next section, we take a look at how oral agreements hold up in court.
Most business professionals are wary of entering into contracts orally because they can difficult to enforce in the face of the law.
If an oral contract is brought in front of a court of law, there is increased risk of one party (or both!) lying about the initial terms of the agreement. This is problematic for the court, as there's no unbiased way to conclude the case; often, this will result in the case being disregarded. Moreover, it can be difficult to outline contract defects if it's not in writing.
That being said, there are plenty of situations where enforceable contracts do not need to be written or spoken, they're simply implied. For instance, when you buy milk from a store, you give something in exchange for something else and enter into an implied contract, in this case - money is exchanged for goods.
There are some types of contracts which must be in writing.
The Statute of Frauds is a legal statute which states that certain kinds of contracts must be executed in writing and signed by the parties involved. The Statute of Frauds has been adopted in almost all U.S states, and requires a written contract for the following purposes:
Typically, a court of law won't enforce an oral agreement in any of these circumstances under the statute. Instead, a written document is required to make the contract enforceable.
Contract law is generally doesn't favor contracts agreed upon verbally. A verbal agreement is difficult to prove, and can be used by those intent on committing fraud. For that reason, it's always best to put any agreements in writing and ensure all parties have fully understood and consented to signing.
Verbal agreements can be proven with actions in the absence of physical documentation. Any oral promise to provide the sale of goods or perform a service that you agreed to counts as a valid contract. So, when facing a court of law, what evidence can you provide to enforce a verbal agreement?
Unfortunately, without solid proof, it may be difficult to convince a court of the legality of an oral contract. Without witnesses to testify to the oral agreement taking place or other forms of evidence, oral contracts won't stand up in court. Instead, it becomes a matter of "he-said-she-said" - which legal professionals definitely don't have time for!
If you were to enter into a verbal contract, it's recommended to follow up with an email or a letter confirming the offer, the terms of the agreement , and payment conditions. The more you can document the elements of a contract, the better your chances of legally enforcing a oral contract.
Another option is to make a recording of the conversation where the agreement is verbalized. This can be used to support your claims in the absence of a written agreement. However, it's always best to gain the permission of the other involved parties before hitting record.
Fundamentally, most verbal agreements are legally valid as long as they meet all the requirements for a contract. However, if you were to go to court over one party not fulfilling the terms of the contract, proving that the interaction took place can be extremely taxing.
So, ultimately, the question is: written or verbal agreements?
Any good lawyer, contract law firm, or legal professional would advise you to make sure you formalize any professional agreement with a written agreement. Written contracts provide a secure testament to the conditions that were agreed and signed by the two parties involved. If it comes to it, a physical contract is much easier to eviden in legal circumstances.
Freelancers, in particular, should be aware of the extra security that digital contracts may provide. Many people choose to stick to executing contracts verbally because they're not sure how to write a contract, or they think writing out the contract terms is too complicated or requires expensive legal advice. However, this is no longer the case.
Today, we have a world of resources available at our fingertips. The internet is a treasure trove of invaluable information, platforms, and software that simplifies our lives. Creating, signing, and sending contracts has never been easier. What's more, you don't have to rely on a hiring a lawyer to explain all that legal jargon anymore.
There are plenty of tools available online for freelancers to use for guidance when drafting digital contracts. Tools like Bonsai provide a range of customizable, vetted contract templates for all kinds of freelance professionals. No matter what industry you're operating in, Bonsai has a professional template to offer.
A written contract makes the agreement much easier to prove the terms of the agreement in case something were to go awry. The two parties involved can rest assured that they're legal rights are protected, and the terms of the contract are sufficiently documented. Plus, it provides both parties with peace of mind to focus on the tasks at hand.
Bonsai's product suite for freelancers allows users to make contracts from scratch, or using professional templates, and sign them using an online signature maker.
With Bonsai, you can streamline and automate all of the boring back-office tasks that come with being a freelancer. From creating proposals that clients can't say no to, to sealing the deal with a professional contract - Bonsai will revolutionize the way you do business as a freelancer.
Why not secure your business today and sign up for a free trial?