You have put a tremendous amount of blood, sweat, and tears into your small business, and now your small business is no longer small but it is a profitable and organizationally strong company that is positioned for rapid growth. Now you are wondering if you should incorporate.
Changing your small business into a corporation can offer a range of advantages for you as a business owner. Corporations are separate legal entities (business structures) that enjoy certain protections under the law and have important benefits.
Many small business owners elect to form a legal business structure to protect their personal assets in the event they encounter trouble down the line. Stated simply, incorporating allows you to run your business without worrying that you might lose your home, car, or personal savings because of a business liability you have incurred. In this article we will discuss the advantages of incorporating your business.
The major advantages of incorporating your small business include the following four areas:
1. Personal Asset Protection
Corporations give business owners to a means to formally separate and protect their personal assets. In a correctly structured and managed corporation business owners will have limited liability for their business debts and obligations. Corporations will typically have more corporate formalities than an LLC that must be followed in order to have the highest level of personal asset protection available. One such formality is maintaining a separate bank account so you don’t commingle your personal funds with the business’s.
2. Legitimacy Name Protection
As a business owner, adding "Inc." after your business name can definitely add instant credibility in regards to how your business appears to potential customers. Additionally, incorporating your business name will discourage others from using the same business name. In most states, other businesses may not form an entity or use a trade name that is the same as the name of the corporation you have. Incorporating benefits your business legally and has the added advantage of helping you in your brand establishment and marketing efforts.
3. Deductible Expenses
Both corporations and LLCs may deduct normal business expenses, including salaries, before they allocate income to owners.
4. Tax Flexibility
If you choose to incorporate, you should know, however, that when a person forms a corporation he or she is taxed at both the individual and corporate levels. However, a corporation can avoid double taxation of corporate profits and dividends by obtaining Subchapter S tax status. Whether it will or not you will get a tax advantage from incorporating depends on a number of issues, including your personal income tax rate, whether you will reinvest income, and whether you will be drawing a salary.
Most people incorporate their business in the state where they reside and operate of their business. However, some business owners have found incorporating in another state to be better for their bottom line. Incorporating your business helps take full advantage of all the blood, sweat, and tears that you are putting into making your business successful.
The form of business ownership isn't permanent; down the road you can change the legal structure of your business if you choose to. A typical situation is for small businesses to start out as sole proprietorships or partnerships and become incorporated as the business grows.
To get the advice best suited to your small business, discuss the right structure with an experienced attorney or accountant.