Most business owners will face the question of whether to incorporate or form a Limited Liability Company (LLC) at some point during the life-cycle of their business. Some may consider incorporating the business venture as a hassle or an expense better spent on matters perceived to more directly reach the bottom line – while others may recognize the significance and importance of incorporating as an essential component to overall business growth, marketing, and legal protections. Whether you are considering opening a startup business or have been operating for years without organizing a formal business entity, you should make the easy the decision to incorporate or organize an LLC to house your business operations.

Protect Your Assets

By officially organizing your business – whether as a corporation or an LLC – you are creating a separate and distinct legal entity. As a result, individual owners of properly formed corporations and LLCs will typically not be held personally liable for the traditional debts and liabilities incurred by the business as part of ongoing business operations – including those related to lawsuits against the business or other claims arising from business activities. Of course, certain exceptions to this general rule apply like debts incurred by fraud and debts for which you as the owner have personally guaranteed payment or performance. But, absent those and other unique situations, owners in a properly organized business entity typically only risk the assets and investments they contribute to the business entity and its operations, including cash and capital infusions, property, and other contributions most owners make to their businesses over time. Having the ability to shield yourself from potential liability for business obligations alone justifies taking the step to properly incorporate or organize your business entity.

Market Your Business Better

Today’s customers, vendors and suppliers are savvy. When making a decision to contract with someone, use a product, or acquire a service, they examine many factors – including whether a business has been properly organized and is in good standing with the State in which it was organized. Having that “Inc.” or “LLC” after your business name through proper incorporation improves your ability to market your business to savvy consumers and other businesses and provides you with instant recognition and credibility. The mere fact that you are organized as a business entity under applicable laws provides a greater sense of trust and confidence in consumers and other business owners, thus leading to greater marketability. Additionally, by organizing your business entity you are acting to protect your brand and your name. In most states, other businesses are prohibited by law from organizing a business with the same company name of an existing and validly organized business. This helps protect your name, your brand, and your ability to strengthen your business through marketing efforts and brand messaging with the confidence that others will not be entitled to use the same name for their own, similar business purposes.

Ensure a Succession Plan

There may be times when an owner of a business will need to leave the business, whether voluntarily in the case of retirement, or involuntarily in the case of death or disability. Regardless of those reasons, the incorporation or organization of a business entity allows for the free transferability of an owner’s interest in the business to others. Because corporations and LLCs are separate and distinct legal entities, when an owner dies or retires, the business entity can (in many cases) continue to preserve operations unlike a partnership or sole proprietorship which would cease to exist upon the death or retirement of an owner. This makes the transition of ownership more attractive to potential purchasers and employees, knowing that the business entity can continue to operate and thrive despite the death or withdraw of the owner of the business.

Tax Benefits with Incorporation

Most properly incorporated small businesses can elect special tax treatment with the IRS in the form of “pass through” income, and other related tax benefits. This simply means that the income generated by the business will pass through to you as the owner rather than be subject to taxation at the corporate level first and then the individual level second. You report the income and loss of the incorporated business on your individual tax return and, subject to applicable tax code limitations, many of the expenses related to the operation of your business may be treated as deductible expenses for tax purposes. Regardless of whether you make the decision to organize your business more formally, you should always work closely with your trusted tax adviser regarding any business-related tax issues.

To Do: Paperwork and Protections

Now that you have made the smart decision to properly and legally organize your business entity, know that there are several additional legal requirements related to the ongoing maintenance of that entity. One of the most important items is ensuring that you timely file required reports with the Indiana Secretary of State providing up-to-date and accurate information related to your business entity.

Nearly every type of business entity organized in Indiana is required to file a Business Entity Report with the Indiana Secretary of State every two years. The deadline for this filing is typically defined as the last day of the calendar month in which the business entity was originally organized. By filing Business Entity Reports timely during the life of your business, you are both (1) letting the Secretary of State know that your business entity continues to operate, and (2) providing the Secretary of State with updated contact information for the business and its registered agent. If you fail to timely file the Business Entity Reports, Indiana law permits the Secretary of State to administratively dissolve your business. Administrative dissolution means that your business can no longer legally operate in the State of Indiana other than for the sole purpose of winding down its operations. Typically, the Secretary of State will take action to administratively dissolve your business entity if you fall five or more months behind in your Business Entity Report filings.

If your business has been administratively dissolved by the Secretary of State as a result of your failure to timely file the required Business Entity Reports, don’t panic. Administratively dissolved business entities can seek to be “reinstated” by the Secretary of State. This is accomplished by filing certain reinstatement documents, including information related to the current and past owners of the business, and obtaining confirmation from the Indiana Department of Revenue that the entity owes no unpaid taxes. The reinstatement process can take time and there are costs involved, including paying a reinstatement fee, paying past due Business Entity Report costs, and possibly legal fees to organize and file the appropriate paperwork. However, once the reinstatement application has been approved by the Secretary of State, the reinstatement is effective retroactive to the date of dissolution and the business can continue to maintain operations as if the dissolution never took place. Additionally, there is a five-year limitations period within which you must file the reinstatement paperwork. If you fail to file the reinstatement paperwork within five years of the administrative dissolution of your business, you will be unable to reinstate the business. Instead, you will be obligated to organize a new business entity, potentially resulting in significant adverse legal and tax consequences if not done properly.

As part of the startup process, new business owners should also take time to evaluate the protection of the new company’s intellectual property (IP) rights and assets. While there are a whole host of specific issues and rights related to a company’s IP rights, generally speaking, IP rights include patents, trademarks, tradenames and copyrights. Learn more about Intellectual Property Considerations for Business Startups in this past blog post.

CCHA Can Help

Whether you are considering starting a new business or investigating what business formation strategy best suits your particular existing business needs, contact CCHA to help guide you through those decisions and to discuss in further detail the benefits and issues related to incorporating or otherwise properly organizing your business entity. Likewise, if you need assistance in properly maintaining your business entity, or if your business entity has been administratively dissolved and you need assistance regarding reinstatement, contact us and we can provide detailed guidance regarding maintenance obligations and reinstatement options.

For more information or for assistance in developing a startup strategy for your business venture or idea, or to discuss other issues related to your ongoing business operations, please contact us.

For more information about Steve and his Business Services practice, please visit his profile.