Does Incorporation Matter When Applying For Business Loans?

Many start-up companies in search of business loans are confused as to whether or not they should incorporate at the very inception of the business, since the company is technically not yet “doing business.”  In addition, each state has different filing fees and annual entity maintenance requirements which create further confusion as to where they should file and what entity is best for their particular business model, ownership structure and business loan needs.
The short answer we give to every client is:  “Always incorporate, it’s the proper thing to do!”  Here are the reasons why:

  1. It’s cheap and easy – We’ve assisted many clients who have paid exorbitant fees to so called “experts” to help in incorporating their business.  Firms that specialize in assisting companies incorporate like to create the illusion that incorporating is complex process that requires professional help.  Not true.  Simply visit your secretary of state website and you will be provided with easy, detailed instructions on how to file your entity.  As part of the business loan process, Seed Capital provides incorporation and entity selection services free of charge.  Even if your company is not yet ready to start the business loan process, contact Seed Capital for a complimentary entity establishment consultation.
  2. The ability to separate the business’ liabilities from the individual – When a business operates as a sole proprietorship, the owner IS the business.  Therefore, the business’ debts and liabilities are also the owner’s, and vice versa.  When an entity is formed, in the eyes of the law that entity is its own living, breathing being that has rights and must pay taxes.  Incorporation creates what is known as the “corporate veil” which protects the business owner(s) and their assets from any negative issues that arise from the operation of the business.  Without such an entity, there is no way to separate the owner from the business’ liabilities and finances.  As such, only through incorporation can a business loan be issued solely in the business’ name.
  3. Banks prefer lending to businesses – When banks grant loans to individuals it is typically for the purpose of acquiring goods.  An individual’s debt obligation rises, however, the income to pay that increased debt remains the same.  However, in the case of business loans, when a bank grants a business loan to a company, it is with the understanding that the business with invest the capital from the business loan to create a return on that investment (ROI).  In other words, the business loan funds aren’t simply used to “accumulate stuff” as in the case with the individual, rather the business loan is used to create wealth.  The lending paradigm is the complete opposite for a business compared to an individual.  And a bank will not grant a business loan to an individual, only a properly incorporated entity can apply for and receive business loans.

Until one has gone through process of incorporation, it can seem complicated and confusing.  Nothing could be further from the truth.  Incorporating is easy, cheap and provides the asset/liability protection that banks require when considering business loans.  Why on earth would banks grant business loans to a company that hasn’t taken minimal amount of care to properly establish an entity to ensure proper asset and liability protection?

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