Wondering when to incorporate a business is a common question that many small business owners have at one point or another. Most start out as sole proprietorship (a person who owns a business and is personally responsible for its debts), and as the business grows, incorporation becomes an important factor for one to consider.
Timing is everything when it comes to incorporating your business.
Consider some of the benefits and possible setbacks to incorporating.
6 Benefits of Incorporating Your Business
Professional Image
Incorporating your business will enhance your image to customers, suppliers and investors. Becoming a corporation enhances your credibility and status, which gives you an edge when competing for business on the professional landscape.
Easier to Obtain Additional Funds
You will enjoy greater ease in obtaining financing and funding from lenders if you incorporate your business. Many lenders won’t even consider lending funds to sole proprietorship without the addition of an incorporated company on the lease contract. Many investors also want a share of the business which can only be done in a corporation.
Possible Tax Advantages
It’s possible that incorporating your business will help you save money on your taxes, but there’s a lot to consider as each business is different. You may have the option of reinvesting the income into the business or withdraw from it a personal salary or dividends. No matter what you do, it's important to have your CPA assess your company’s unique financial situation to see how incorporation will benefit you.
Less Personal Liability
With an incorporated business, your business is liable for its debts. This is beneficial in the case of being sued, or if you’re unable to pay your suppliers. With a sole proprietorship, there’s no difference between your personal assets and those of your business from a legal perspective. Incorporating protects your personal assets, and that's pretty important.
Establishes Business Interests Among Founders
In order to maintain a clear understanding of ownership among various founders of a business, incorporating early is key. Each owners’ financial and management rights will need to be clearly specified in the legal documents. It will also make it easier to distinguish who owns how much and who has the decision making authority. This will prevent any future misunderstandings and this will help avoid potentially costly legal disputes.
Incorporating Protects Your Assets When Hiring Employees
It’s a good idea to incorporate before hiring employees. This is because employers are liable for their employees' actions including mistakes that they might make which could affect the business.
Setbacks of Incorporating Your Business
Some people incorporate their business too early, and, it is more expensive than running a sole proprietorship. There are fees associated with the incorporation process itself and there are other compliance requirements you’ll need to maintain, such as keeping certain records, annual reports and shareholder meetings. When considering if you should incorporate, its important to remember that its easier to discontinue business as a sole proprietorship, as corporations need to go through a formal dissolution process.
Make sure to consult with a CPA before deciding to incorporate, so you can be sure you're ready to make this move.