Many years ago, I taught business entities1 – corporations, limited partnerships and limited liability companies – to American audiences put together by a wealth creation speaker.
At one event, I ran across an individual who said he had to have a corporation set up immediately.
When I asked him what was going on, he explained that he was being hired as an independent contractor to consult with a major client.
Hurray! Congratulations!
But they wouldn’t hire him … only his company.
To get the job, he had to incorporate.
Why would his client care if he had a corporation or not?
Stay tuned. The answer may be important to the growth of your business.
The vast majority of small business owners in the US are sole proprietors or general partners - like hair stylists, realtors, network marketers, handymen, coaches, and accountants.
They work hard to put food on the table and pay the bills.
And, more often than not, they never think about the need to incorporate.
| But there are many reasons why one may want a business entity, including 1. Liability protection 2. Asset protection 3. Tax benefits 4. Credibility 5. Privacy 6. Separation of personal and business life 7. Going Public |
To be clear, most of us will never need to think about reason #7.
We’ll each build our small business over a number of years and either turn it over to our children, sell it, or simply close it down when we want to retire or do something else.
But during the time we’re building, there are things we need to think about, including Credibility.
Hence the question – Do I Need to Incorporate to Be Taken Seriously?
| Credibility isn’t simply a matter of ensuring people believe you have the skills to do the job you’re being hired to perform. |
It’s also ensuring people understand you intend to be around long enough not only to do the job, but also to follow up, answer questions, and fix problems.
Let’s look at 2 different lines of work to see how this plays out.
According to the Direct Selling Association2, in 2016 there were a record 20.5 million people in the US involved in direct selling. These are folks who could buy at a discount, sell at retail, and sponsor others to do the same.
Altogether they sold $35.54 billion in products and services.
Network marketing is a big business ...
and it’s a business based on trust.
The customer trusts that what the rep is telling her is true.
She trusts that the testimonials that she is being given are accurate.
She trusts that she will see results similar to what others have seen.
Because of that one-on-one trust factor, no one cares or even thinks to ask if the rep is incorporated.
It simply doesn’t matter.
| In network marketing, the rep isn’t more trustworthy because she has an LLC. |
On the other hand, it may be a deterrent to people thinking of joining the business.
Network marketing is a business of duplication.
You teach your reps – your downline – to do what you’re doing to build their businesses.
If your prospective rep thinks she has to incorporate in order to build a solid network marketing business, it might scare her off.
Not everyone has the money and the knowledge to incorporate and to maintain that corporation or LLC or limited partnership.
Does that mean you should never incorporate if you’re a network marketing leader?
Not at all. However, you may want to wait until the tax advantages of being incorporated make it worthwhile or you have a personal brand that you’re building.
Coaching is very much a one-on-one or one-to-a-few business.
And here the credibility of the coach is the most important factor in determining success.
But that credibility does not come from having a corporation.
It comes from results …
Do people who follow the coach’s advice see positive results?
| The only times a corporation or LLC might be a requirement are 1) if a large company is hiring an independent coach to do work for them. 2) if a company is considering sending its clients to the coach on a referral basis. |
In the first instance, the hiring company wants as much distance as possible from the coach it is hiring. The company is hiring an independent contractor, not an employee; and hiring a company rather than an individual strengthens its position.
If the hiring company is audited by the IRS, its position that it has hired an independent contractor is far more credible if it has hired a company, not a person, to provide the service in question.
In the second instance, the referring company wants to make sure that the person it is sending its clients to is not only skilled but also reliable.
Anyone can hang out a shingle stating they are now a coach …
and take down that shingle a week later if they decide to do network marketing instead.
Anyone who values their clients wants to ensure that the person they are sending their folks to will be around for the long haul …
and it is far more likely that someone who has taken the time and money to incorporate is serious about what he or she is doing.
As with network marketers, coaches will want to look at incorporating when they are earning enough money to make incorporation worthwhile if they have not set up their LLC or corporation beforehand for branding reasons.
The information above also applies to consultants.
So, are there times when a person should incorporate immediately for credibility?
In some industries, workers are more credible if they have their own companies.
Think of building contractors.
A sole proprietor looks more like a handyman than like a licensed general contractor …
but add on a company name and that same person looks like a businessman.
The same thing may be true of people in the beauty industry, people providing office services etc.
Whether or not to incorporate is not a decision to jump into lightly.
There are a lot of factors to take into consideration.
If you’re considering setting up a company to look more credible, talk to others in your industry and those who work with people in your industry.
See what their take is on the effect of seeing a company name on a business card rather than just the name of an individual.
After you’ve done your research, talk to your tax professional and your attorney.
If you all agree, then get started.
To Your Success,
Wendy
Note 1: Wendy Byford is not an attorney or tax professional. The information in this post is of a general nature only, and is meant solely for educational and entertainment purposes. You are requested to contact your own professional team before deciding what to do about your specific situation.
Note 2: From the Direct Selling Association 2016 fact sheet.
