To incorporate or not to incorporate?
Are you wondering whether incorporation is right for your business? You may have heard a lot about it, but there are many different points to consider. Not only do the pros and cons vary based on business type, geographic location, and industry, incorporating can also result in added complications such as increased tax liability. With these factors in mind, take some time to research the pros and cons of incorporation before making a decision.
The future is uncertain for small businesses on their own; incorporating your company can provide protection against any potential challenges that come your way. On the other hand, there may be additional fees involved with incorporating which could potentially hamper your finances if you don't plan well enough. Here are some of the main benefits and disadvantages of incorporation.
Benefits
Pass-Through Taxation: One major benefit of incorporating your business is that you can reap the benefits of pass-through taxation in lieu of corporate taxes. This means that your income will be taxed at an individual's tax rate, which can result in smaller tax liability as well as a lower tax rate for your business in general. Pass-through taxation can also help to ensure that owners are not double taxed, avoiding taxes on investments and capital gains on earnings. You will also not need to file a tax return for the company if you do choose this option.
Capital Raising: Incorporation can also provide for easier capital raising due to the fact that owners may not need to be involved with the day-to-day operations of the business. This means you can more easily seek outside funding, including loans and equity investments, as a corporation. Additional benefits of incorporation include fewer legal liabilities, greater operational and financial flexibility, larger company size, and more credibility in the marketplace (source).
Protection: As previously mentioned, incorporating your business can also provide some protection from certain liabilities. If your company sells a product that causes harm or injury to a customer, for example, you will not be personally liable for such damages as long as you have followed all government regulations. There are also other protections (including some tax benefits) that you will be afforded as a result of incorporation.
Disadvantages
Additional Costs: One potential disadvantage to incorporating your business is the added costs associated with it. Incorporating your business will likely involve government fees, as well as additional accounting costs, including those related to the preparation of corporate tax returns and filings. Incorporation can also lead to additional costs for legal services, especially if you continue to operate as a single-member LLC or other entity. It's important to consider all of the potential costs associated with incorporating before making your decision.
Legal Liability: Another potential disadvantage is increased legal liability for your company. If your business engages in risky activities, you may be at greater risk of personal liability as a result of incorporating. This may also occur if you are involved with other companies that have been incorporated in the past and are now insolvent due to the failure of their parent company. There is also some concern that if companies become larger, their legal liabilities can increase as well. For this reason, other companies may choose to remain small and independent to avoid this risk (source).
Delays: Incorporating your company can also lead to a significant delay in starting up operations. This is because there is paperwork involved in the incorporation process that takes time, as well as additional contracts and fees that need to be paid. Once you do incorporate, it's also important to keep up with all of the necessary local, state and federal legal requirements for your business. Additional responsibilities include filing taxes on a continuous basis (quarterly or annually), following company policies and procedures, forming an audit committee and adhering to a number of other regulations (source).
Business Entity Name: It's also important to remember that your business name will likely be the very thing that customers, suppliers and the like will remember. Incorporating can also mean that a potential buyer would expect you to change your name; they may not accept the name you have chosen for your business if the government has already reserved it for another company. It's considered best practice to choose a name that is easy to spell and pronounce, represents what your business does best, and is not distracting or confusing (source).
IRS Privacy Issues: Perhaps one of the most significant disadvantages of incorporating is that it does interfere with individual privacy. The IRS has determined that any business that is formed as a corporation will receive the same privacy protections as an individual, which means that you cannot disclose your personal information unless authorized to do so by the company itself. Business owners who have only a single-member LLC won't be able to use their Social Security number for business purposes, and will only be able to provide minimal information about themselves (source).
Conclusion
Incorporation can provide significant benefits for your small business. Although it is not suitable for all companies or industries, it can help to protect against liabilities in certain cases and may provide additional benefits and flexibility. In some cases, it can also help you to raise capital more easily. If you decide to incorporate, be sure that your company name is available, as well as all of the other necessary paperwork and required fees. It's also important to consider the benefits of being an LLC versus a corporation beforehand.
Note: Your state may have further requirements for your LLC or corporation that can affect its taxation status, structure and availability for legal protection (source).
Have you ever incorporated your business? What were some of the benefits and drawbacks? Share your thoughts with us in the comments below!
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Published on Oct 20, 2016 by KPaterson13. Last updated May 26, 2019.
About the Author: KPaterson13 is a freelance writer who enjoys blogging about business-related topics. You can connect with her at wwww.freelancewriterlife.com or see her other work on-line at www.writingandmorewritingtips.com and www.jobsearchbloggingtips.com .
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Conclusion By KPaterson13 While incorporation may seem like a daunting process to many business owners, it can actually be an important and beneficial component in setting up your growing business. There are pros and cons to incorporating your business, so it's important to consider all of the potential benefits and detriments so that you can decide whether or not it's right for your company. If you're still not sure if incorporation is right for you, consider these factors: Tax benefits and/or services
Protection from certain liabilities
Additional government fees (and possibly taxes)
Additional accounting costs
Greater legal liability For many businesses, incorporating could be a good option, but there are also other options that may provide similar benefits.