Sometimes it’s the first thing people do when they start a small business. Sometimes it’s the last.
Regardless of where you land on that spectrum, you’ll probably want (and need) to incorporate your business at some point. There are plenty of reasons—from tax benefits to asset protection—that make incorporating your business a profitable decision.
But if you’re still hesitant to whether or not it’s actually necessary, here are 6 financial reasons you should consider incorporating sooner rather than later.
There are a lot of things that are important when starting a small business, being able to raise capital—if need be—is one of them.
Incorporating your business will make it easier for you to raise money by adding a sense of legitimacy to your business.
Think of it as your announcement to the world that you’re committed to your business and ready to put your best foot forward. It builds credibility for your business. And in the cutthroat world of small business, this is incredibly important.
Along the same line as raising capital, the ability to issue stock options is essential to small business owners just starting out.
For new businesses strapped for cash early on, the option to offer third parties stock options or to purchase equity instead of upfront payment can help offset some of the initial costs of setting up shop.
Just make sure that the entrepreneur in you is comfortable with handing off pieces of your business… Because once you relinquish them, they can be difficult to get back.
As much as we like to think we’re prepared for everything, accidents happen. Sometimes they’re preventable. Sometimes they’re not.
Either way, you need to be prepared in case one happens.
Protecting your personal assets should be at the top of the list, and incorporating your business will give you this opportunity.
If an accident were to happen in your place of business or if your business were to fail, if you’re incorporated as a Limited Liability Company (LLC) or a C or S Corporation, you’ll be protected from both business debt and lawsuits. That means that if there’s ever an accident in your business in which a customer or client is hurt and sues, you won’t be personally liable.
It also means if your business falls on hard times and into debt, your personal property is off-limits to collection agencies.
As excited as you are to be starting or running your small business, there might be a day when you decide to part ways and sell your business.
If and when this happens, getting a good offer will naturally be important.
Being incorporated will help. It’s a fact that, in the small business world, sole proprietorships and partnerships are less attractive to buyers.
Incorporating your business will help give you a leg up on any competition. You’ll want the greatest amount of leverage possible while negotiating an offer, so try to leave nothing up to chance.
If you incorporate for no other reason than the tax benefits, it’s still worth worthwhile.
As a sole proprietor or partnership, you simply don’t have access to all of the tax benefits that LLCs or C or S Corporations do. Incorporating your business will provide you with a variety of tax deductions, including deductions for: health insurance, life insurance, and savings on self-employment taxes.
As a corporation, you’re also less likely to get audited by the IRS. Since sole proprietors are more likely to either under or over report deductions, the IRS has a tendency to more frequently audit sole proprietors.
Tax laws, however, are complicated. It’s always best to check with a CPA before claiming any deductions.
You might have encountered this dilemma already:
Maybe you’ve gone to the bank looking to open a checking account or apply for a business credit card, only to have the bank representative ask you for an employee identification number (EIN) and a name registration.
Though sole proprietor and partnerships can open bank accounts and qualify for credit cards, if you haven’t yet determined your business type, you might as well incorporate.
It’ll not only let you bank as a business, but will also provide you with all the additional benefits we’ve mentioned above.
Whether you started your business because you had a passion that needed to be fulfilled or you were looking to create something to pass down to your children, it’s important that your business can remain intact either after your death or your departure from the business.
That’s especially important if you or a family member is ever looking to sell:
By incorporating as a C or S Corporation or an LLC, you’re giving those around you—and your business—that option. Businesses that are structured as partnerships or sole proprietors, on the other hand, simply end if management changes or there’s a death.
Why—and if—you decide to incorporate will depend on the individual needs of your business and what you see as your professional end goal.
For all the reasons we’ve listed above, we recommend incorporating. It’s the only surefire way to secure the long-term health and success of a business. And though it’s not a guarantee, it helps prevent any unexpected events from throwing you off track and out of business.
Determining the business structure that is right for you should not be taken lightly, so be cautious and do your research when making this decision.
Love seeing ShopKeep on the Fundera Ledger! Thanks Sara!