Taking the Right Steps to Incorporate a Business

In order to start building business credit you will need to first select the proper entity formation for your company.  This step by far is the most important because it’s the foundation for what you will be building your business credit upon.  Not to mention all the other important areas that incorporating a business affects such as taxes, liability and asset protection.

When you decide to select your business structure, the first questions that an entity formation specialist will ask you are:

What Does Your Business Do?

This will be a deciding factor for getting you into the best structure for taxes. How your income is taxed depends on the type of income your business earns. If your income is earned through passive sources -- rent, portfolio income, etc., it will be taxed differently than if your business provides a product or a service that you sell.

Where Do You Live?

This question is more important than you think because where you live can make a difference to the kind of business structure you form. Some states charge more for one type of structure over another. An entity formation specialist will ask you this question because it allows them to choose the best economic structure for your company.

How Much Does Your Business Earn?

This question again relates to taxes, and is specifically geared towards someone who receives "earned" income (that’s income from selling a product or providing a service). There’s an income threshold to look at -- once your income surpasses it, it’s time to rethink your options.

Taxation is a Critical Factor!

Did you notice that all three of these questions are related to taxes? That’s the secret lesson to take away here. All business structures will work in all situations. The secret is knowing which business structure best matches your income and tax situation so you keep more of what you earn.

The mistake I see so many business owners make is selecting the wrong entity structure for their company. They get anxious about building business credit and think that one type of entity is better than all the rest. There is no cookie cutter approach to entity selection because every business is different. Don’t take any shortcuts in this step because it can cost you big time.

As a business owner, you have four real choices when it comes to business structures for building business credit, and two bad choices:

• C Corporation
• S Corporation
• Limited Liability Company
• Limited Partnership
• Sole Proprietorship
• General Partnership

To learn why Sole Proprietorships and General Partnerships are so dangerous to you and your family, read on.

A Sole Proprietorship is bad…

Have you heard the saying, "You get what you pay for?" Well, you normally don’t pay anything to start either a Sole Proprietorship or a General Partnership. Of course you don’t get anything, either.

Unless you count the following as valuable business assets:

• Lots of personal liability
• No protection from your business creditors
• An increased risk of being audited
• Problems with valuation for a subsequent sale of the business

The reason for this lack of protection is because neither of these structures is considered a separate legal structure. Instead, they are considered personal extensions of you, if you are operating as a Sole Proprietorship, or you and your partners, if you’re operating as a General Partnership.

And, because these business types are considered personal extensions of you, you don’t have any protection from them.

But a General Partnership is downright ugly!

It gets even worse if you are operating with a partner as a General Partnership. That’s because not only are you responsible for all debts and agreements you enter into in the name of your business, you’re also on the hook for all of your partner’s actions in the name of your business as well. This can be devastating if your partner is financially irresponsible, and, because either of you can bind the partnership; you have zero protection from your partner.

If You Don’t Choose a Good Entity, the Government Will Choose a Bad One for You!

If you’ve been doing business up to now without a business structure, both the IRS and your state government have defaulted your business into either a Sole Proprietorship or a General Partnership.

And that means you’re exposed.

Now is the time to select the proper business structure if you want to build business credit and you want to protect yourself from personal liabilities.

Follow Marco on Twitter @MarcoCarbajo and read more of his insights on how to establish business credit.