As a small business, you’ll likely have heard that it can be beneficial to become incorporated, but what does this mean, and is it right for you? Most businesses start as a sole proprietor, the default business structure, and the most common in the US. Nothing is wrong with being a sole proprietor, but it may not be the most beneficial business structure for you as your business grows. A sole proprietor is considered the same business entity as the business owner, meaning that any business risk is also a direct risk to you.
Why should you consider incorporating?
Incorporating as a small business comes with several benefits, the first being limited liability protection:
- Incorporating turns the business that you own its own legal entity, meaning that you won’t have to pay for business debts out of your pocket. Doing this reduces your risk significantly, and even if the business goes bankrupt, you won’t lose personal assets to cover the cost.
- Incorporating your business can also reduce your taxes’ complexity and ensure you’re not overpaying.
- If you’re trying to look more professional or more prominent than you are, then incorporating it is a good step. Customers may be influenced negatively if they think you’re a more casual business, and becoming incorporated could help attract new customers.
- As a sole proprietor, you can’t apply for business funding, as you and the business are the same entity. As a limited company, you can also sell shares to raise funds, and banks may be more willing to offer you a business loan.
- The final reason you may want to incorporate your business is to extend its life beyond the business owner’s life. Sole proprietorships no longer exist if the owner dies, which means that it can’t be passed on to another person. By incorporating your business, it can run through many generations.
What are the disadvantages of incorporation?
While there are several advantages to incorporating, there are also some disadvantages you should consider.
The first is that you’ll need to fill in additional paperwork, and more information must be provided when you file your tax return. As an incorporated business, the forms and admin you’ll need to fill out are significantly more detailed than a personal tax return, so there may be a learning curve in the first few years.
Also, many states need you to pay filing fees for your taxes, which can be expensive. You may decide to hire someone to handle your taxes and additional financial admin like payroll, which is an additional cost to prepare for. When filing your taxes as a C corporation, it’s also essential to be aware that the IRS can tax on both the business profits and any shareholder profits, meaning that you’re essentially being taxed twice.
Finally, the process of becoming incorporated can be complicated for those that haven’t done it before. To make sure that everything is done correctly, you may want to speak to a consultant or outsource it completely. You can find more information on business incorporation services here.