Starting a new business, or growing your existing one, can be both challenging and exciting. If you are like many entrepreneurs, you no doubt have a passion for your niche, and you do a lot of the grunt work yourself, just for the joy of it. But sooner or later, you are going to have to make some business decisions that will determine the rate at which your business grows, and how you protect yourself from the pitfalls that inevitably come with success.
Sole Proprietors or Small Partnerships often shy away from incorporation because they fear that the added structure will somehow interfere with the uniqueness and flexibility of the brand. But incorporation has many benefits and protections that you should at least consider.
Benefits of Incorporation
While there are a few extra regulations that corporations must abide by, the benefits of incorporation may far outweigh any inconveniences.
- Protection from liability for business debts: In a Sole Proprietorship or Simple Partnership, the business owners are personally responsible for all debts incurred by the business. This means that your personal assets, including your home and your car, could be in jeopardy if the business should go bankrupt. A corporation is considered a separate entity from its owners, and is liable for its own debts.
- Tax advantages: Incorporating can offer many tax advantages, like being able to write off your health insurance premiums, and savings on self-employment tax. In the long run, that means more money for your hard work.
- Increased credibility and growth: Incorporating your business lets existing and potential customers, and competitors, know that you are in it for the long haul. which boosts your credibility and instills trust. In fact, even if you die, your corporation will live on.
- Easy money: A corporation can quickly raise funds by the sale of stock, and being incorporated makes you a more viable entity for banks to do business with.
- Easy to transfer of ownership: Transferring ownership of a corporation is relatively uncomplicated, and you can walk away without much baggage.
The Down Side of Incorporation
Like all good things, incorporation has its down side.
- Double taxation: If you incorporate as a C Corporation, your business will be taxed, and so will you and your shareholders when income is distributed as dividends. You can avoid double taxation by incorporating as an S Corporation.
- Oversight of record-keeping: There are specific requirements for the types of records, such as meeting minutes, annual reports, etc., that must be kept by a corporation, and which are subject to scrutiny by the state.
- State fees: Depending on the state where your corporation is located, you will most likely have to pay fees for incorporating, and in some cases ongoing annual fees to stay in business.
As your business grows, you may find that the benefits of incorporation outweigh the disadvantages. You will also have to decide whether you want to form a Limited Liability Corporation (LLC), an S Corporation, or a C Corporation. Regardless of which you choose, the protections incorporating offers against personal liability will be well worth it.