The question “should I incorporate my small business?” is a consideration that can weigh heavy on the mind of many a budding entrepreneur or established small business owner.
Whether you are the sole employee of your enterprise or you have several employees, incorporation can bring legal and tax protection for you as its owner, but can also bring tax burden, additional cost and paperwork. So it’s important to understand the implications of the business structure you choose for you business.
Outlined below are some of the benefits and disadvantages of incorporating your business as well as links to available government resources that can help you decide which business structure is right for you.
Benefits of Incorporation
Here are some of the benefits you can realize if you decide to incorporate your business:
- Personal liability protection – An incorporated company is an entirely separate entity from you and your personal assets. It affords protection from any personal liability for your business debts and obligations. For example, if someone sues your company they can only go after your company’s assets, not your own.
- Tax benefits - If you incorporate you may gain tax benefits, although only under certain circumstances. This is one area to discuss with an accountant, as the marginal tax rates for corporations with taxable incomes in some cases can be higher than those for an individual in the same scale. Read more about the tax implications of incorporating on Scott Allen’s Entrepreneurs’ blog here or get tax information from the government here.
- Corporate identity – Incorporating can give a great sense of credibility to your business.
- Raising capital - You can raise capital more easily through the sale of stock and securities if your business is incorporated.
- Unlimited life - Your corporation can have an indefinite life and outlive you. Do note that LLCs have a limited duration. Get more information on business structure differences from the SBA.
Disadvantages of Incorporation
Some of the disadvantages of incorporation, particularly for the small business owner, include:
- Paperwork – You’ll need to file two tax returns (one for you one for your business) and maintain detailed business records and formalities.
- Cost – The fees associated with initial incorporation and ongoing maintenance can put a strain on the small business owner. LLCs, however, can be a more economic alternative to full blown incorporation.
- Liability may not be as limited as you think – The main advantage of incorporating, limited liability, may be challenged by personal guarantees and/or credit agreements. When a corporation has insufficient assets to secure a loan, banks often insist on personal guarantees from the business owner. This can result in you being personally liable if your corporation can’t meet its repayment obligations.
How to Incorporate
If after careful planning and consideration you have chosen to incorporate your company, you will need to pursue the process directly with your state. In fact, you are required by law to register your business with the state whether you choose to be a corporation, non-profit, LLC, or a partnership.
Typically, if you only operate in one state, you should incorporate in that state. If you operate in multiple states, you should determine which state is the friendliest to corporations and incorporate in that state.
Find out how to incorporate in your chosen state by following the state-by-state links here.
Save the expense of calling your accountant and take advantage of the freely available expertise of a network of government and other small business experts over the Web, the phone or in person:
- Get help and advice from small business development experts.
- Understand the tax implications of incorporation or other business structure options.