4 Reasons California Business Owners Choose to Incorporate

Imagine you’re the sole proprietor of a prosperous small restaurant in San Diego, California. 

At first, everything seems straightforward. You oversee the day-to-day operations of the restaurant, determine recruiting needs, monitor finances and accounting, etc. 

However, as your restaurant starts to grow—perhaps you’re opening a second location, employing more staff, or even attracting investors—you’re beginning to face some challenges.

One major issue is, despite your best efforts, your personal assets and finances are more closely linked to the restaurant than you would like, causing you to worry about what would happen to them if the establishment encounters financial or legal troubles.

Over 80% of business owners begin their entrepreneurial journey as sole proprietors, and many of them have faced the circumstances we described above.

Like many of them, you should incorporate your business once you’ve reached this point.

To “incorporate” means to legally constitute a business as an independent entity from its proprietors or individual(s) managing it, usually in the form of a corporation.

In California, incorporating entails submitting specific documents to the Secretary of State, including the Articles of Incorporation, and adhering to ongoing requirements such as conducting board meetings and keeping separate books of accounts for your company. 

Please schedule a free consultation with the business formation attorneys at Gallagher Krich, APC when you’re ready to incorporate your business.

After incorporation, your business is treated by the law as its own “person” with responsibilities and rights of its own. It can pay taxes, own property, file lawsuits or be sued, and enter into contracts.

Entrepreneurs often elect to incorporate when they’re prepared to take their business to the next level. There are several benefits to this decision, which we’ll go over in-depth in this post.

4 Benefits That Come With Incorporating a Business

• Personal Liability Protection

America is home to 30M+ small enterprises. For multiple reasons, such as contract disputes, employee claims, and product liability, more than 40% of these businesses face litigation or threats of lawsuits annually. 

Additionally, 66% of small businesses experience monetary challenges at some point in their existence.

Considering the enormous risk of your company getting sued or having financial problems, you should incorporate it. Here is the rationale behind this action:

Partnerships and sole proprietorships don’t offer liability protection. Under these business structures, proprietors are held personally responsible for debts and liabilities incurred by their business. 

This means awarded legal claims and unpaid debts can be settled using a business owner’s personal assets, like a house, cars, or savings.

Incorporation transfers liability for business debts and obligations from proprietors to their corporation—because the law considers it an independent entity from its owner.

This legal separation guarantees that, as long as your company doesn’t engage in any illegal activity and complies with all applicable corporate laws, including maintaining different personal and business accounts and keeping accurate records, creditors can only seize business assets—and not your house or car—to satisfy your company’s debts and obligations.

• Tax Savings

Ever wonder why, despite generating billions of dollars in profits every year, some of the biggest U.S. corporations pay little or nothing in income taxes?

These large enterprises minimize, and often eliminate, their corporate income tax obligations by taking advantage of a bunch of tax deductions and breaks available to incorporated businesses.

For instance, corporations can significantly lower their total taxable income by claiming tax deductions on a broad range of business expenses when filing tax returns, including salaries, employee perks, operating costs, and equipment purchases.

Also, corporations are permitted to put a portion of their profits back into the business. At the end of the year, the total tax due is decreased since the reinvested income is taken out of the net profits.

As a sole proprietor, you may save thousands of dollars annually by incorporating your small business and utilizing the above and many other tax breaks and reductions.

• Easier Access to Capital

Lenders are less inclined to grant big-business loans or credit lines to sole proprietors than to incorporated borrowers, mostly because the owner is personally liable for all outstanding debts.

As a result, small business owners who choose not to incorporate have greater difficulty obtaining loans to expand their operations than those who do. You can open company accounts and take out loans in your firm’s name after you incorporate.

Additionally, sole proprietors are unable to raise capital by selling stocks in their business. However, corporations can draw investors by issuing shares, which provides owners with a simple way of selling a portion of their company for much-needed funds or personal gain.

Given their official structure and limited liability protection, investors also prefer incorporated enterprises. 

Without having to worry about being held accountable for an organization’s actions, an investor can provide funds in return for stock. Investors, on the other hand, may be exposed to liability after an investment is made in partnerships or sole proprietorships.

• Perpetual Existence

Unlike you, your business can live forever!

By incorporating, your business has perpetual existence, meaning you may be sure that it will always be there and continue to carry out its contractual obligations, even if the founders decide to sell their stake, retire, or die. 

When an owner leaves or passes away, sole proprietorships and partnerships either dissolve or get entangled in legal issues, which can seriously disrupt succession planning and negatively impact business partners, customers, and staff.

Organizations that intend to create long-term value, transfer ownership to future generations, or prepare themselves for acquisition would benefit most from perpetual existence.

All this said, there are drawbacks to incorporating a business. 

For example, many entrepreneurs opt not to incorporate because they believe that the formalities of running a corporation—such as scheduling annual shareholder meetings, recording minutes, electing directors, and adopting bylaws—make it difficult and costly to manage. Limited liability firms, partnerships, and sole proprietorships are exempt from these requirements.

Many U.S. states also charge recurring business fees, which are higher for corporations than general partnerships or sole proprietorships.

Learn More from a Business Formation Attorney

Choosing to incorporate your business is not just a formality; it’s a calculated decision that can safeguard your assets, lower your tax burden, provide access to capital, and set you up for future expansion.

At Gallagher Krich, APC, we make the incorporation process easier, handling every step of the process, from helping you select the best structure that aligns with your business’s goals to ensuring that all required filings are accurate and your business is adhering to local licensing and zoning laws.

If you’re prepared to incorporate, give Gallagher Krich, APC, a call at (858) 926-5797 or submit our online form to schedule a free first consultation. Together, we can begin the process of incorporating your California business today!