The Ins & Outs of Incorporation

As your business changes, you have to change the business itself. Brian Daly, president, Providence Lawn and Landscape, Inc., Catharpin, Va., knows this well, having grown his operation from a sole proprietorship to a limited liability company to finally, a corporation.

“After a while you begin to realize that there are certain steps you need to take,” said Daly, who recognized that as his business expanded, he needed the increased structure and liability protection that being a corporation would provide. “As my personal assets grew, incorporating just made sense,” he said. And while incorporation isn’t foolproof or fail-proof, it is a “good faith effort” to enhance his business while protecting his assets, Daly said.

REDUCING RISK. Such as with Providence Lawn and Landscape’s case, limiting liability is probably the single biggest reason why companies incorporate. Because a corporation is a separate legal entity, the personal liability of shareholders is limited to the contributions they make to their corporation, according to Christine Butts, attorney and president, IncorporateUS, an online incorporation service based in Houston, Texas.

This protection from liability is especially important for landscape contractors, she pointed out. Since contractors contend with two enormous risk factors – physical labor and transportation – in the course of daily business, minimizing potential liability nightmares is essential, Butts said.

Butts, who specializes in asset protection, often advises her contractor clients to protect themselves from these risk factors by incorporating into one or several business entities. By creating several entities within a company – a central business and transportation and labor divisions, for example, “it’s like putting a fortress around each component,” Butts said. As companies expand, they need to seriously consider protecting their assets and incorporation is a good way to do this, she suggested.

Chris Joyce has been thinking about incorporating for the past three years. As president of Joyce Landscaping, Marstons Mills, Mass., Joyce has run his company as a sole proprietorship since its inception. But with his volume up to $2 million, a rapidly expanding fleet of vehicles and a growing work crew, he knows the time has come to reduce his ever-increasing personal liability. Otherwise, as Joyce's accountant told him, he is just a “sitting duck.”

Similarly, separating personal and business assets was increasingly important for Michael Hornung, president, Valley Green Professional Lawn & Tree Care, Inc., St. Cloud, Minn., who began his business in 1990 and incorporated one year later. “My greatest liability is an employee driving down the road in one of our trucks. If they hit and possibly killed someone, I would be held personally liable if the business wasn’t incorporated,” Hornung said. “Liability wasn't really an issue when the business was just me, but when you start adding employees and vehicles, you increase your exposure and, in turn, your risks.”

In order to fully realize the liability protection that incorporation provides, contractors must be careful to diligently observe the formalities of a corporation, Butts warned. This includes using bylaws, holding annual meetings and keeping separate financial records, for example. This also means not using the company’s checking account as your personal account, Butts said.

IMAGE IS EVERYTHING. Another advantage incorporation provides is presenting a more polished, professional image. When you’re vying with bigger operations to land a commercial account, being incorporated can give a contractor an extra edge over the competition, according to Brad Gibson, president, Southern Lawn Services, Inc., Sugar Land, Texas. “Being incorporated makes you look like one of the big guys right off the bat,” said Gibson, who observed that incorporation isn’t as important in the residential realm, where his competition generally consists of small, pickup truck operations. “With residential jobs, incorporation isn’t taken into account as much,” he said.

Daly also prefers the heightened level of professionalism and organization incorporation has brought to his company. “Being incorporated is more of a definitive way of doing business,” he said. “It adds one more level of sophistication.”

Robert Kern, president, Kern Landscaping, Inc., Parma, Ohio, agreed. “People know what they’re dealing with – you’re not just some fly-by-night company,” said Kern, who incorporated just four months ago after realizing that he was paying more taxes by operating as a sole proprietor.

ADDITIONAL ADVANTAGES. While Rachel Kelly, vice president, Greenovations, Inc., Baltimore, Md., incorporated in 1995 for legal protection and tax advantages, she also had the future in mind.

With an incorporated business, she didn’t need to worry about the fate of her company if she decided to retire. As an incorporated entity, the life of the business would not depend on her involvement. “I wanted to be able to distance myself from the business in the future,” she said.

Being incorporated has made Kelly more thoughtful about getting involved in potential business deals. “Offers come up all the time, but when you’re incorporated, it’s more difficult to say ‘yes,’” Kelly said.

Incorporation also offers a way to apportion interest in a business entity. If you have a sole proprietorship, you can’t sell, transfer or make a gift of interest in your company, according to Butts. Incorporation, however, allows you to do all of these things, she said. Acting as a “conduit for transferring equity,” a corporation can transfer or sell stock, which is particularly important if a business needs to raise capital, Butts pointed out.

Other incorporation advantages include the ability to set up pensions, profit sharing and stock option plans.

Hornung appreciates the structure that incorporation adds to his company, especially in terms of letting his employees know that while he’s the boss, he’s one of them, too. “With incorporation, the owner is treated like anybody else in the company,” Hornung said. “There’s not the status issue as much.”

THINK BEFORE YOU INC. While incorporation can be beneficial for a business, it’s not for everyone. Lanette Bowman, owner, Plant Doctor, Glens Falls, N.Y., has been both incorporated and a sole proprietor, and prefers operating as the latter. After nearly two decades in the industry, she has found that her customers simply don’t care whether she has an “Inc.” after her company’s name. “Being incorporated is not as important as the quality of product you put out there,” she said. “My large clients don’t care if I’m incorporated or not. They just care about liability insurance, which you have to have, regardless.”

Bowman initially incorporated because of the liability issue. With her primary accounts at area hotels and resorts, she didn’t want to risk an unfortunate situation such as a pot falling on someone’s head or a pesticide accident, she said. She also thought incorporation would “add something to her profile,” but in retrospect, it was an unnecessary expense. In 1993, Bowman sold her incorporated business to her No. 1 competitor and in 1999, started her own operation as a sole proprietor. Based on her experiences, she recommends that contractors remain unincorporated as long as they’re comfortable with the degree of responsibility and personal risk they’ve taken on as business owners. “You should hold off as long as you can afford to,” Bowman advised.

Butts agreed with Bowman’s approach to operating a small business. “I would not recommend forming an incorporation or limited liability company if you are the only employee, since the logic underlying these business structures is to protect shareholders from corporate liability,” she warned.

“If you are the only employee in your business, you will be personally liable for any mishap or accident even if you are incorporated,” Butts pointed out.

While incorporation has its advantages, know what kind of business entity ultimately works best for your company, advised Joshua Keller, operations manager, Keller's Turf and Shrub Care, Inc., Independence, Mo. “The business form you operate in must fit your needs. And, as your business grows or personal situation changes, so will your needs,” Keller advised.

“Keep in mind that your decision will have an impact on both the amount of tax you and your company will pay, and the risks to which you subject you and your business,” he said.

There are distinct advantages and disadvantages to any business entity. (see “Weighing The Options” on page 164) “So, whichever entity you choose, periodically review whether your current form of business is still best for you,” Keller offered.

GETTING STARTED. Thankfully, incorporating is relatively easy to do and generally affordable. While the cost and time varies from state to state, incorporating can take anywhere from a few days to a month. The process can cost anywhere from $300 to $800, depending on whether you do it yourself or through an incorporation service or attorney.

Increasingly, incorporation can be as simple as a few clicks of the keyboard with a range of incorporation services now available on the Internet. Butts started her online company, IncorporateUS www.incorporateus.com, in 1999, after recognizing the opportunity for automating the incorporation process. “I realized that whenever clients came in to incorporate, I took 20 pieces of information and then I didn’t do a whole lot,” said Butts. “If I could automate the process over the Internet, however, they could get it done a lot more efficiently.”

And more inexpensively, too. Butts said the average Internet service incorporation cost is around $500, compared to the $1200 an attorney might charge.

Whether you do it online or through your secretary of state’s office, incorporating is a straightforward process that any savvy contractor can accomplish, Butts said. “There’s enough information out there to do it yourself,” she advised. “An attorney is just going to parrot that knowledge back to you, anyway. The truth is that if you already have a good handle on what you’re doing, you can incorporate yourself.”

If contractors decide to incorporate, they should know what they’re getting into. Butts advised consulting an accountant to get familiar with the tax repercussions and other key issues. Above all, if contractors aren’t sure if they should incorporate or aren’t willing to do it themselves, consulting an attorney might be wise, she said.

The author is Associate Editor of Lawn & Landscape magazine.