Is Incorporation Right for Your Business?
11 July, 2018
Business incorporation is now a day's similar to the responsible business ownership. However, there are still a lot of rumors and misconceptions about the perks of business incorporation. This means that even those who are deep into entrepreneurism are also not sure if they should incorporate their business, if it is right for them, where to start and how much it would cost.
The incorporation of a business is basically an umbrella term for the various business structures that are available as options. And now that you know this, business incorporation might be the right one for a few business owners but not all. So, it is vital for you to take a step back and figure out whether it is actually worth it and even the right thing for you.
Here are a few points that need to be kept in mind and considered:
What is Business Incorporation?
As shared above, the incorporation is a term that includes several options for structuring your business legally. The business structures include cooperative, Non-Profit 501(c)(3), S-corporation, Corporation, a Limited Liability Company (LLC), and so on.
Moreover, there is not a rule that once you choose a structure, it cannot be changed later on in the future when the business grows. It is possible, and in fact, many small business owners begin their business as sole proprietorship or as a partnership and then, later on, change the structure when the company grows into a success.
But the most popular business entities that are selected by many owners are the LLCs and Subchapter S Corporations, due to the benefits that come along with these two types of structures. And for deciding which one is better for you, it is crucial to study all the different structures and then choose.
The Disadvantages of Incorporation
People always begin with the positive which can confuse you while you choose whether something is good for you. But we would like to share the disadvantages first before we can talk about the advantages that basically affect the small owners mostly. They are:
- Liability might not be as limited as you thought: The advantages of the limited liability of the incorporation might be claimed by the credit agreements and the personal guarantees. For instance, when a company does not have the proper assets to avail a loan, the bank usually insists that the owner should provide the personal guarantee. And this would result in you losing your personal assets for the repayments in case your corporation doesn't meet the obligations.
- Cost: For the startups, the fees of the incorporation and even the ongoing maintenance can become a tension. Nevertheless, LLCs can be a much better alternative for incorporation as it offers the operational flexibility of a partnership, tax efficiencies, and limited liability features of a corporation.
- Paperwork: You would need to keep good records and file two tax returns, depending on the type of structure you choose.
The Benefits of Incorporation
Now, let us talk about the benefits that would help you decide if incorporation of your business is the right answer for you:
- Unlimited Life: Your corporation could easily have a lifetime that is indefinite, and that can outlive you. But, if you choose to form an LLC, it has a limited duration, and you would have to renew it.
- Raising Capital: If your company is an incorporated one, you would be able to raise capital easily via the sale of securities and stock.
- Corporate Identity: By incorporating your business, it would have a much higher sense of reliability.
- Tax Benefits: Incorporating your business would offer you a lot of benefits, even though it would be provided under some specific circumstances. Moreover, it is better to discuss with an accountant for this as the marginal rates for the taxable incomes vary.
- Personal Liability Protection: A company that has been incorporated offers protection to the owner for their personal assets keeping it away from the business debts and obligations. For instance, if some person sues your incorporated business, you would not have to pay for anything with your personal assets even though the company is in debt.
Is Incorporation Right for My Business?
All in all, selecting the business structure for your company is related to a lot of factors like the business objectives, your tax obligations, your risk of liability, and so on. Moreover, it is evident that every company has distinct needs and the law is different in every state. Hence, it is better to have a reasonable discussion with a professional attorney about this and then make the right decision for your business.
Starting the Process of Incorporation
Every business is incorporated with the state government in which the company is based. And for incorporating, you can also take the help of an online service that can help you with the incorporation and the registration process. Though, it is highly advised to be sure about the agency before using them to open your business.
Now that you know what the idea is behind the incorporation of a business, ensure that you make the right choice that would help you grow and not become a problem for you.
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