When you start your own business, the question, Do I have to incorporate my business? Maybe one of the last things on your mind.
Of course, you don’t have to incorporate your business. No law exists which requires all new businesses to become corporations.
So a better question to ask is, Should I incorporate my business?
Incorporating your business brings both pros and cons. Accordingly, you need to know all the consequences of incorporating before you make your decision. Knowing when to incorporate a business is just as important as knowing whether you should incorporate at all. Read on to learn whether incorporating is the right choice for your business.
Why Should I Incorporate My Business?
This is a question that every business owner will ask themself at some point. Asking why you should (or should not) incorporate your business is a more useful question than focusing on whether you have to incorporate. So let’s look at the benefits and drawbacks of incorporation.
Benefits of Incorporating Your Small Business
There are many advantages to incorporating. These advantages depend on whether you incorporate as an S corporation (S-corp), C corporation (C-corp), or a limited liability company (LLC).
Protecting your personal assets from business liability
Regardless of whether you pursue an S-corp, C-corp, or LLC, these structures will create a firewall between your business’s assets and your personal assets. Sole proprietors, on the other hand, can lose their personal assets through their business activities.
This same concept applies to both costs and debts. If your incorporated business has debts, your personal assets—your home, savings, personal vehicle, and investment portfolio—are safe from creditors. A sole proprietor wouldn’t have those same protections.
Depending on your situation, your business can benefit from lower tax rates as a corporation than as a sole proprietorship. However, a sole proprietorship has its own tax advantages in a few situations because of the fact that your business income and personal income are combined.
As a sole proprietor, your business is indistinguishable from you. If you pass away, your business disappears as well.
Incorporating your business ensures its survival regardless of what happens to you personally.
Disadvantages of Incorporating Your Small Business
Despite the benefits it offers, incorporating isn’t right for everyone. There are several drawbacks of incorporation.
Incorporating costs time and money
Being a sole proprietor is free and requires no paperwork. When you incorporate, you have to file various documents and pay fees to the state that you decide to incorporate in.
Incorporation documents often aren’t straightforward. That’s just one reason why you should consider hiring a qualified business law attorney to represent you.
Ongoing incorporation costs
In addition to the start-up incorporation costs, you’ll have extra ongoing costs. These include annual legal filings to maintain your good standing with the state, as well as corporate tax filings.
Corporations are more difficult to close
In a sole proprietorship, the business can close whenever you decide to quit or simply take a break. To close (or “wind up”) a corporation, you often have to comply with specific procedures, like passing a corporate resolution. You’ll also have to close out corporate finance accounts and file additional paperwork.
But Why Should I Incorporate My Small Business?
Clients ask us this question all the time. They also ask, Do I need to incorporate my small business?
Again, there’s no requirement to incorporate. The key is to apply the factors we discussed above to your situation as a small business owner.
Are you really concerned about your personal liability? Then you might want to incorporate your small business to protect your personal assets and get more favorable tax treatment. It might also be a good decision to incorporate if you imagine your business as a longer term venture that you want to expand and develop.
On the other hand, if you’re just running a small, short-term side business, incorporation may not be worth the hassle and expense.
A knowledgeable business attorney will be able to show you how incorporation could help your small business.
When Should I Incorporate My Small Business?
The best time to incorporate your business depends on your situation. Are you considering a massive expansion of your business? Are your personal circumstances about to change? Are you thinking about quitting your day job and investing 100% of your time and energy into your business?
The answers to all these questions will affect when you should incorporate your business.
Have More Questions About Incorporating Your Small Business?
Maybe you’re still wondering, Do I need to incorporate my business?
If so, that’s completely understandable. Incorporating a business is an important decision that requires careful planning and consideration.
A qualified business attorney is a great resource to assess you and your business situation. An attorney can give you more detailed information about the benefits and drawbacks of incorporating, help you learn more about your options, and tell you what steps you should take next.
In his ten years of practice, Adam Curly has helped many clients and small businesses with a broad array of litigation and transactional matters, including incorporation techniques. Adam’s clients range from large corporations to small entrepreneurs who are just beginning their business adventure.
Here at the Curley Law Firm, we have the experience necessary to help you resolve whatever business issue you might be facing. If you’re still wondering whether you should incorporate your business, contact us online or give us a call at 832-225-3448.