You will encounter many forks during your entrepreneurial journey. It is a very difficult task to make the right decision every time. The most common forks that companies will face is whether they should move their business from sole proprietorship status to another legal entity. Entrepreneurs that want to build credibility and personal assets will mostly go for incorporating their business.
Why incorporate your small business?
Corporate entities are actually considered as an individual by the law. They are just like a person. It can buy its own properties. Also, corporates can sell their properties. Corporates can engage in contracts, commit crimes, and file taxes. It will remove the burden from the founder.
There are three different types of legal entities:
This is used when there is more than one business owner. You can either make a general or a limited partnership. A general partnership means that every individual will have their share of assets, profits, and legal liabilities. It offers unlimited liability which simply means that all owners will responsible for legal issues and debts. In a limited partnership, partners will be committed only at a financial level. Your liability will depend on your investment. They are not responsible for handling the company operations. Venture capitalists and Angel investors mostly act as a limited partner.
• Sole proprietorship
This is mostly the default status of all the small businesses. It simply means that the business is operated and owned by a single individual. According to law, there is no difference between the individual and the business. It won’t be taxed separately and all the income will be considered as the income for the sole proprietor. He needs to handle all the taxes.
A corporation is a separate business entity that is owned by multiple shareholders. The board of directors will manage the organization activities. Shareholders are not responsible for the organization’s actions.
Most corporations are LLC or Limited Liability Company. In this, shareholders are treated as partners. They will have some stakes in the organization’s losses and profits. However, the organization will be taxed separately and shareholders don’t need to worry about it. The tax benefit of LLC is very attractive to small business owners.
Pros of incorporating a business:
• Personal asset protection: Incorporating will ensure that your personal wealth is protected from common lawsuits. This is the most important benefit of incorporation.
• Credibility: If you want to incorporate, then you need to find a unique name of your business. This will provide protection to your company name. Adding Corp or Inc in your company will also increase the credibility of your company.
• Tax flexibility: Corporations can also enjoy various tax benefits. For example, C corporations have to pay the lowest tax. S Corporations don’t need to worry about the self-employment tax. Every state has different tax policies. Thus, you should look for the best tax options available.
• Deductible expenses: Large corporations are taxed according to their profits. You can also enjoy some deductions for approved expenses like salaries, operating expenses, travel fees, and advertising costs.
Cons of incorporating a business:
• Formalities: If you are incorporating your business, then you need to document all the business operations. Many activities will become mandatory like annual meetings and corporate audits. You need a registered agent that will help you in communicating with government bodies. Uncorporated businesses don’t need to worry about these formalities.
• Expense: Corporations require more expenses when compared to sole proprietorships. For example, you need to hire a corporate attorney who will ensure that you are following all the business laws. In some states, you need to pay for workers’ compensation insurance. These costs will increase your overall budget.
It is difficult to maintain a corporation. You need to invest a lot of time and money. However, there are various benefits of incorporating a business. If you need more assistance, then you should hire a corporate attorney.