The Green Sheet Online Edition
February 08, 2016 • Issue 16:02:01
Many benefits to incorporation
It doesn't matter if you run a small ISO with a handful of in-house agents or if you operate as an independent merchant level salesperson (MLS), you still need to function as a legal business. If that business is a sole proprietorship and you want to grow – and most salespeople in the payments industry do – at some point, you will likely find yourself contemplating incorporation.
Of course, you will absorb costs to incorporate that don't exist for business owners running a sole proprietorship. There is also a series of documents to create and steps you have to follow annually to stay in compliance with Internal Revenue Service regulations for corporations. However, this investment could pay off in spades if you find yourself confronted with legal challenges or want to pursue venture capital. There's also the matter of attracting enterprise level clients who view incorporation as a sign of credibility and will not work with sole proprietorships.
A recent article published by Entrepreneur magazine addresses the topic of incorporation. According to that article, there are eight core reasons a business owner should incorporate a company early on:
- You can isolate your business from personal accounts.
- Liability for initial setbacks or lawsuits should be business, not personal.
- The focus on structure makes building a business plan a priority.
- It helps you manage taxes.
- Principal stock is taxed at the time of incorporation.
- New intellectual property belongs to the business.
- Equity negotiations work best if the equity is in the form of shares.
- You need a business entity to attract investor and bank support.
Are payment companies different?
James Huber, a Partner at Global Legal Resources LLP, which works closely with payments industry ISOs and merchant service providers, agrees with this list. He told The Green Sheet that companies in the payments industry face risks, so not incorporating leaves them without any legal protections they may need at a moment's notice. "Incorporating provides you with a good level of protection from the merchant and others in the event there is a class action suit or a concern over lack of fulfillment," he said.
Huber also said corporate protections can be tough to circumvent, and those in opposition will generally have to "pierce the corporate veil" to get through to an owner in a lawsuit. "In corporate law, you have to show that some kind of fraud or something else bad happened to require the individual owner to be named in a lawsuit," he said. "If a company sues a corporation and names the owner, it's generally pretty easy to get the owner's name dropped."
Huber also noted that incorporating is generally a fundamental decision. "The real purpose of doing it is mostly for accounting purposes, but you can also get better tax benefits, health insurance, zero interest credit cards, etc.," he said.
More than the average business
Although Huber's list of pros essentially mirrors the one published in Enterpreneur, he offered a few refinements. He said the inherent risk associated with the payments industry can make affordable insurance tougher to qualify for without the protections of incorporation in place. He also pointed out how important it can be to vendors and prospective customers, particularly if a business is in a start-up phase or running a small ISO.
"It does create the air you are bigger than you actually are, and it adds a level of sophistication in the eyes of the merchant, because it creates an impression you are more established," Huber added. "Vendors also like – and some even require – ISOs to be incorporated or they won't extend services, so we encourage our ISOs to have all their agents incorporate, too."
Huber stated this process protects the ISO from the risk of fly-by-night MLSs or those who don't take steps to set up a legitimate business entity. On this note, he also cautioned ISOs to hold agents accountable to the IRS seven-point test that ensures they are operating legitimately and aren't misclassifying anything. "There are risks from every angle, so why wouldn't you take whatever steps you can to protect your business?" he said.
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