One of the biggest decisions you’ll likely face with your small business is whether or not to incorporate. This is something not to be made lightly as you will need to consider your own needs, as well as the future needs of the business.
Here are some of the things to consider when deciding whether or not to incorporate your small business:
There’s No Line Between Business and Personal
Among the very first things you have to consider is liability. Remember; when you are a sole proprietorship, there is no line between your property and the company property — it’s all the same. So if someone sues your business, your personal assets are on the line.
While incorporating won’t always completely protect your personal assets from such a situation, it can help. By creating a legally separate entity, it’s possible for you to achieve some measure of protection for your personal assets if your business is under attack, and vice versa.
A Smooth Business Succession
Another thing you have to consider is whether or not you want the business to pass on to someone else. A sole proprietorship ends with the death of the owner.
However, a corporation or a partnership has the potential to pass on. If you want your business to remain intact beyond your passing — if you are planning to build something that will last and your children and grandchildren can carry on — it makes sense to incorporate in some way.
The Taxes and Advantages
Take into account the possibility of reaping tax advantages and other benefits. Incorporating can provide you with the opportunity to boost your retirement account savings (tax-advantaged accounts), as well as provide you with access to certain tax breaks and benefits, associated with running your business.
It can also provide benefits for your employees. Carefully consider these items, and determine whether or not the benefits outweigh some of the costs.
Simplified Costs and Benefits
Incorporating can be an expensive proposition depending on the complexity of your proposed business. My business is organized as a Limited Liability Company, and it’s fairly simple.
I see some benefits from this arrangement but I can’t scale up very easily — but, I don’t plan to. I chose this organization because I don’t need anything complicated and because it was relatively inexpensive to set up.
If your business is more complex, it can make sense to incorporate and explore your options. But remember, things start to get expensive once you have to organize payroll, benefits and other items related to incorporating.
Carefully consider whether or not these costs are worth it. Will you ultimately be closer to achieving your goals with the help of a corporation?
If you are looking to scale up and pass your business on, the costs of incorporating now might be worth it since you could see bigger benefits later.
Speak with a knowledgeable accountant who can help you go through the implications of incorporating and help you decide what business organization is right for you and your situation.