Every small business owner faces the dilemma of deciding whether or not to incorporate or form a limited liability company. Therefore every small business owner needs to ask, "How much debt is the business footing right now?" and "Will the business be taking on additional risks (such as new employees, more customers, etc.) now and in the future that could wipe out personal assets if things don't turn out?" "Has a certain level of income been obtained?" "Has a big contract been scored?" Answering these questions leads to the next steps of analyzing the advantages and disadvantages of incorporation.
Advantages of incorporation
Here are some of the advantages of incorporating your small business:
- Protection for Your Personal Assets (limited liability). Undoubtedly small business owners never plan to run into legal or financial complications. Unfortunately, it does happen. Small business owners should take precautionary measures to avoid losing hard-earned personal assets. Additionally, debts acquired in the corporation are limited to the corporation's assets. In most cases, incorporation prevents debts from extending to the shareholders of a company.
- Taxes. Many small businesses indulge in a lower tax rate.
- Credibility. From a marketing perspective, business incorporation provides an added level of integrity that may not be harvested from sole proprietorship status. Customers may feel more confident that they are doing business with a reputable company – one with an "Inc." stamp on it.
- Perpetual Existence. Companies that are incorporated can outlive their shareholders. An incorporated business can virtually survive forever.
Disadvantages of incorporating your business
Like with everything, the good comes along with the bad, and there are a few drawbacks to consider with business incorporation:
- Administration. Maintaining separate personal and corporate accounting records may magnify into more accounting expenses. Requirements may also include an election of directors. Regular shareholder and director meetings are also mandatory along with maintaining accurate records of minutes.
- Expense. There are fees associated with incorporation as well as the annual expense of preparing the appropriate financial statements and additional tax returns for both the corporation and the shareholders.
- Double Taxation. Unfortunately, although double taxation is minimized, it still does exist. Income will be taxed at the company level. It may even be taxed at the shareholder level if dividends are paid.
Entrepreneurs face a number of choices when choosing a legal structure for their businesses. To assist in the decision-making process, they should seek advice from an attorney or accountant. Entrepreneurs may also consider devising a comprehensive asset protection plan to insulate their business and personal assets from the claims of creditors.
Keep in mind that with any business, incorporating is just one step in starting or running an enterprise. There may be additional requirements for a particular business, industry and/or location, such as business licenses and/or permits. Free resources such as www.toolkit.com offer assistance in satisfying these requirements and also offer more than 5,000 pages of cost-cutting tips, step-by-step checklists and real-life case studies, startup advice and downloadable business templates for entrepreneurs and small business owners.
Julie Henningfield is a member of the Marketing Team for BizFilings, the preferred online incorporation experts for over 500,000 small business owners. Read more about Julie here.