Starting a business can be a life-changing event that leads to flexibility, increased income, and ownership of something you’ve built from the ground up. While there are many benefits to incorporating, most new business owners aren’t sure if it’s right for them.
Incorporating your business, whether it’s an online business or brick-and-mortar, is taking your business status from sole proprietorship or partnership to a formally recognized company by the state of incorporation. And today I’m going to explain the advantages so you can fully understand before deciding if it’s right for you.
Table of Contents
- Protect Your Personal Assets
- 2. Tax Optimization
- 3. Build a Better Reputation
- 4. Easier Access to Capital
- 5. Transferability of Ownership
- 6. Perpetual Existence
- 7. More Detailed Record-Keeping
- 8. Business Name Protection
- What Are the Disadvantages To Incorporating a Business?
- The Benefits of Incorporating a Business
8 Benefits of Incorporating Your Business
Protect Your Personal Assets
When you incorporate your business, you are separating it from your personal assets. As a result, your business becomes a Separate Legal Entity, complete with its own tax identification number. This is one of the biggest advantages of incorporating because it protects you and your business if something were to happen to either one of them.
Let’s take an example if your business was sued for some reason. Without incorporation, a judgment against you could result in having to liquidate some of your personal assets. That could mean losing your home, investments, etc. Being incorporated means the legal claims can only go after your business assets.
The same goes if you file personal bankruptcy– incorporating protects your business assets. That means you might have to liquidate personal assets to repay debts, but you won’t have to repay personal debt using business assets.
Incorporating essentially severs ties between your personal and business assets, which can offer serious protection if something major happens.
Ready to incorporate? Check out our guide How to Start an LLC in 7 Steps
2. Tax Optimization
Incorporating a business actually has a number of tax benefits, from deductions to tax savings, and these advantages apply to both large and small business owners.
Incorporated businesses can deduct expenses, including medical insurance, related travel expenses, daily business expenses, employee pay, and premiums you pay on behalf of your employees.
If your business doesn’t make any money for the year, you can also deduct the losses from your income taxes. That means you can also write off items sold at a full or partial loss, damaged or outdated items, etc.
Incorporated businesses may also qualify for the federal small business deduction which is calculated as 9% on the first $500,000 of taxable income. This can potentially lower your net corporate business tax to an even lower rate than you receive on your personal income.
You may also see lower taxes on your income because corporations pay different tax rates than individuals. It also may be possible to pay yourself in dividends, which are taxed at an even lower rate. I recommend talking with a tax professional about this particular benefit because they can help you determine an income set up that’s the most advantageous to you.
3. Build a Better Reputation
Incorporating your business adds legitimacy to what you’re doing. That’s not to say that only serious business owners incorporate, but it does tell potential customers or clients that you’re legit.
Legitimacy and trust go such a long way, and it’s a way to set yourself apart from other small businesses. Being able to add “Inc” or “LLC” to the end of your business name carries weight. It adds to your reputation, brand, and total business identity.
Having a corporate business identity goes a surprisingly long way.
4. Easier Access to Capital
I just mentioned that one of the benefits of incorporating is legitimacy and reputability, and this can be a massive help if you’re looking for investors or need to take out a business loan.
For appearance’s sake, your business looks like a much better investment if you’ve taken the time to incorporate. But there are practical reasons too, like limited liability. If something happens in your personal life, debt collectors can’t come after your business.
In addition to taking out bank loans and finding investors, incorporated businesses can build credit and even sell equity to raise capital.
5. Transferability of Ownership
There may be a time when you want to transfer the ownership of your business to another person, and that’s significantly easier for incorporated businesses.
Most of the benefits of incorporation are short-term ones, but this is a long-term perk that can help you transfer your business to a child, someone else in the business, etc. In addition, you may be able to transfer ownership via stock or an exchange of assets.
Because running your business as a sole proprietor ties the business to its owner, transferring isn’t possible unless you incorporate.
6. Perpetual Existence
You spend a lot of time and energy building your business, and it can continue to and exist and grow even after you’re gone. That’s if you incorporate your business because it’s possible to transfer ownership.
Think about the kind of legacy you can build for yourself and your family if your business continues on into future generations. The foundation you’ve built doesn’t have to be torn down after your lifetime. Instead, it can keep growing and provide for your family indefinitely.
7. More Detailed Record-Keeping
Incorporated businesses must keep good records. If you’re not a fan of paperwork, this might sound like a disadvantage, but hear me out. Being required to keep good records will only help you at tax time. No more scrambling around at the last minute to pull everything together because you completely forgot.
Strong record-keeping will give you a clear picture of how well your business is doing and any financial issues you need to address before they become a major problem. You’ll also be ready with records if you need a loan or want to find investors.
Just because detailed record-keeping takes more time, it doesn’t mean it’s a bad thing.
8. Business Name Protection
Your brand is everything in business, and your name is one of the most significant parts of that brand identity. Incorporated businesses can protect their name so that no one else in your state can use that name. Sole proprietorships and partnerships have no business name protection.
What Are the Disadvantages To Incorporating a Business?
While there are several benefits of incorporating, there are still disadvantages you should be aware of. You’ll need to spend some time weighing up the pros and cons before making a decision.
Disadvantages of incorporating:
- The cost: There are initial set up fees and regular paperwork that you may need to pay someone to fill out on your behalf.
- Lots of paperwork: Don’t like paperwork, then incorporating your business may cause some additional stress. You are legally obliged to fill out annual returns, corporate tax returns, and keep track of meeting minutes.
- Pay more taxes: Some scenarios when incorporating will cost you more than operating your business a sole proprietorship. It’s worth talking to a tax professional to understand how your business status will affect your taxes.
The Benefits of Incorporating a Business
I incorporated my business pretty early on, and I’m glad I made that decision when I did. Sure, there is more paperwork now and ongoing accounting costs, but it’s given me the ability to take my business in the direction I want.
It’s been overall really positive for me, but you will need to figure out the best structure for operating your business.
The good news is that you don’t need to incorporate to start a side hustle, freelance, or work as an independent contractor. Many people start as sole proprietors and then rethink their business structure over time.
As your business starts to grow and you become established, you can choose to incorporate. It’s honestly a solid choice for most entrepreneurs to pursue eventually.