Many business owners might balk at the prospect of turning their small business into a corporation, seeing it as a burden with a myriad of complex details that aren’t necessary for a small operation. But there are a surprising number of upsides to incorporating your business, and even small business owners can stand to gain from taking the legal step when forming your business.
Incorporating your business creates a separate legal entity that represents your business. The upside is that you don’t have to represent your business alone. This gives you a lot more flexibility as a business owner, but it also means you will be expected to handle a lot of extra paperwork and fees in the process of setting your business up. Whether you need such liability protection depends on what kind of business you’re operating and how you intend to see it grow.
Incorporating is for long-term thinkers
Business owners consider incorporating their businesses because they are thinking about the future of their business. After all, with a sole proprietorship, the business is inherently tied to you and that means you will be completely responsible for all finances related to the business. That means should your business end up in debt, your property could be seized to pay off that debt.
When you incorporate, the corporation holds the liability, not you. That means your personal assets won’t be on the table (for the most part), and you aren’t risking absolutely everything with your business. In addition, you will have more clear legal guidelines to direct your company, and you will have a far easier time transferring capital, stocks or ownership of the company, since it’s not tied to you.
Having this flexibility means you can plan ahead for the day your small business becomes a public business, or enables you to pass the business on in the event that you no longer are able to or willing to run it. Not tied to a single person, corporations won’t be dissolved by your death, making them better for long-term planning than sole proprietorships. In other words, if you intend your business to outlast you, incorporating it is the way to go.
It helps your business
Since incorporating a business makes it a permanent entity, other business owners are more likely to take an incorporated business more seriously. The LLC appendage is valuable if you create a close LLC. With more respect, you’re likely to generate more business and have better luck networking and developing relationships. In addition, incorporating your business allows you to deduct crucial expenses like employee salaries before you begin allocating owner income, which can reduce your final tax bill. Sole proprietorships cannot do that.
Incorporating your business makes it more legitimate and protects it from any unexpected events. You have legal protection for your financial assets and you have more legal guidance to dictate how to operate your business without encountering legal snarls.
It does come with downsides - since there are more fees and far more paperwork, business owners who intend their business to remain a side hobby or a small one-person operation may not see any need to incorporate. However, anyone hoping to see their business grow and expand can expect to see benefits from starting a corporation.
Jeremiah Owyang is an internet entrepreneur