Let’s face it: not every company risks being sued. For most solopreneurs, say marketing consultants or designers, operating as a sole proprietor will suit them just fine. But then you have higher risk industries, like technology. What happens if another company sues you, claiming you stole their idea? Are you prepared to risk your personal assets to cover court costs?
Fortunately, you don’t have to jeopardize your own assets.
Separating Your Personal from Professional Persona
If you run a tech startup, I cannot stress enough the importance of separating yourself from the business. That means you need to do so legally, and you do that by choosing the right business structure.
Both corporations and LLCs create a delineation between you as a person and the business. That means if you are sued, the court can’t take your personal assets (house, savings, etc.) to cover the expenses.
And while you’re attracted to the risk and reward that the tech industry brings, you can appreciate that anything you can do to protect yourself is worth doing.
Tax Savings: Who Doesn’t Want Those?
Another reason entrepreneurs in the tech industry need to carefully consider their business structure is taxes. As your startup grows, you’ll pay more in taxes. But if you’re not careful, you can pay more than you need to.
Both corporations and LLCs offer tax savings, in different ways:
- The federal tax rate for corporations is lower than for individuals, and your corporation may qualify for certain tax deductions.
- An LLC qualifies for “pass through” tax treatment. That means you only report profits and losses on your personal tax forms, and you don’t have a separate form to fill out.
Raising Capital More Easily
If you, like many tech startup founders, plan to raise funds for your business, no investor or VC will take you seriously unless you’re incorporated. They want to know you are professional and plan to be in business for years to come. Funny how a little incorporation paperwork can prove that.
Expanding Your Ownership
If you’re not the only owner of your tech company, filing as a corporation or LLC can help you take on more shareholders. Unless you file as an S-Corp, which has a limit of 100 shareholders, you’re unlimited in how many owners your business can have.
Easy Transfer of Ownership
Let’s say one day you want to cash out and enjoy life on a beach somewhere. If you run a corporation, it’s pretty simple to transfer ownership to your business partner.
There are so many reasons to carefully consider which business structure is right for your tech startup, so spend some time on the decision. And if CorpNet can help in any way, we’d love to.