7 Reasons to Incorporate Your Business
- Easier to raise capital.
- Allows you to issue stock options.
- Protects your personal assets.
- Easier to sell and transition.
- Saves on taxes.
- Easier to open a business bank account or credit card.
- Enjoy added credibility with customers.
Most small business owners start out as sole proprietors. As a sole proprietor, there isn’t much distinction between you and your business. For example, a creditor can come after your personal assets to satisfy business debts.
For added protection, you’ll need to incorporate your business. There are plenty of reasons—from asset protection to tax benefits—that make incorporating your business a profitable decision. But if you’re still hesitant to whether or not it’s actually necessary, here are seven financial reasons you should consider incorporating sooner rather than later.
7 Reasons to Incorporate Your Business
1. Easier to Raise Capital
There are a lot of things that are important when starting a small business, and the ability to raise capital is at the top of most business owners’ lists. Incorporating your business will make it easier for you to raise money by adding a sense of legitimacy to your business. A few lenders only work with corporations and limited liability companies. And most ask for business-specific financials, which is easier to provide when there’s a clear line of separation between you and the company.
2. Allows You to Issue Stock Options
Along the same line as raising capital, the ability to issue stock options can be important for small business owners just starting out. Debt financing is a more realistic option for most small businesses in need of capital. However, some small businesses are good candidates for venture capital financing and are able to attract investors.
In these cases, the option to offer investors stock options or to purchase equity is critical. Investors usually like working with businesses that are organized as C-corporations. Just make sure that the entrepreneur in you is comfortable with handing off pieces of your business. Once you relinquish them, they can be difficult to get back.
3. Protects Your Personal Assets
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, claimants and creditors can come after your business or personal assets. If you’re incorporated as a limited liability company (LLC) or as a corporation, you’ll be protected from personal liability for business debts and lawsuits. That means legal claimants and creditors can only recover payment out of your business property. They can’t come after your home, personal vehicle, personal bank accounts, etc. And if your business falls on hard times and goes into debt, your personal property is off-limits to collection agencies.
The catch is that if you sign a personal guarantee on a loan, then your personal assets are open to exposure even if you have an LLC or corporation.
4. Easier to Sell and Transition
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 obviously be important.
Being incorporated will help. 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 competition. You’ll want the greatest amount of leverage possible while negotiating an offer, so try to leave nothing up to chance.
Another important distinction is that incorporated business entities and LLCs 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-Corporation 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 (though assets might transfer to a beneficiary).
5. Saves on Taxes
If you incorporate for no other reason than the tax benefits, it’s still worthwhile. As a sole proprietor or partnership, you simply don’t have access to all of the tax benefits that LLCs or corporations do. Incorporating your business will provide you with a variety of tax deductions. For example, you can write off salaries, bonuses, and payroll taxes. You can also deduct 100% of your health insurance premiums and other fringe benefits.
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.
6. Easier to Open a Business Bank Account or Credit Card
If you’ve gone to a bank looking to open a business bank account or apply for a business credit card, the bank representative probably asked for your employer 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. Sole proprietors might have to provide more personal financial information before qualifying.
7. Enjoy Added Credibility With Customers
There are also more intangible reasons to incorporate your business. Customers, vendors, partners, and anyone else you might do business with generally give more respect to a business with Inc. or LLC at the end of its name. Your business appears more professional when it exists independently of you. This can help with brand boosting and expansion efforts.
How to Incorporate Your Business
Once you decide to incorporate your business, there are few different ways you can do so:
- On your own – You can contact your state’s secretary of state office or business filing agency to get started. They will tell you the procedures and costs of incorporation.
- Online legal service – The other option is to use an online legal service such as LegalZoom or IncFile. These websites will handle incorporation on your behalf for a reasonable fee.
- Business lawyer – Larger businesses or those with more complicated business structures should consider hiring a business attorney to handle incorporation. Business attorneys are very familiar with state and industry-specific laws and can help ensure a smooth start to your business. Many lawyers charge a flat fee for incorporation.
Whichever option you choose, incorporating a business usually can be accomplished in a few days.
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 or establishing an LLC. It’s a good 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. Consult a business attorney if you have questions specific to your company
- Financial-Planning.com. “How Likely is an IRS Audit for a Client?“