Is incorporating your business the right move? This guide will help you decide by walking you through the pros and cons of small business incorporation.
You run a business that you’re proud of. But at some point, you start wondering if you should make things a little more official. Soon enough, your thoughts turn to small business incorporation.
Is incorporating right for your business? This guide will walk you through the pros and cons, different business structures to consider, and how to begin the process of incorporating your small business.
What Does Small Business Incorporation Mean?
When most people start a business, they begin as a sole proprietor. This is the most common business structure because it’s the default structure: If you don’t register as a different kind of business, you will automatically be a sole proprietor.
While a sole proprietorship may fit your business for a while, it might not be a long-term solution. The government doesn’t consider a sole proprietorship to be a separate business entity from the business owner. As a result, you’re missing out on benefits by keeping personal and business mixed.
If being a sole proprietor isn’t right for you, it’s time to incorporate. Incorporation is the process of formally filing your business as a separate entity with your state.
There are a number of reasons it’s beneficial to incorporate your small business, including:
Limited liability protection: As a sole proprietor, you and your business are one and the same. This means that you could be held personally liable for business debts and need to repay them from your personal assets. Incorporating creates a separate business entity, which can protect your personal assets. Tax optimization: Business taxes can get complicated and expensive quickly. But you may be able to minimize or optimize the taxes that you pay by choosing the right business structure. Credibility: Having a business that is registered with the state can make you look more credible to potential customers. Access to funding: Sole proprietors don’t have access to business funding opportunities because they’re not a separate business entity. For example, as a sole proprietor, you can’t sell shares in your company to raise money and banks may be less willing to give you a business loan. Unlimited life: When the owner of a sole proprietorship passes away, the business ends. Incorporation can keep your business running for generations. What Are Some Drawbacks to Small Business Incorporation?
While incorporating a small business is a good idea, there are also drawbacks to doing so, including:
Additional paperwork and tax filings: Once you incorporate, you will have a long list of administrative tasks that you need to do regularly for your business. This can include additional tax filings, record-keeping and tax deadlines that are different from your personal tax deadline. Initially, you may feel as though you are constantly filing taxes and organizing paperwork. Increased cost: Many states require annual filing fees, and depending on the state these fees can be very expensive. Depending on your business structure you may also decide to pay for a payroll service, as well as hire a lawyer or a certified public accountant (CPA) to ensure everything is set up and reported correctly. Double taxation: While some business formations can be tax advantageous,Continue reading