Money Girl explains the pros and cons of incorporating your small business, and when to consider it.
The main downside is that there are fees to get set up and maintain your corporate status each year, which vary depending on the state where you do business.
Advantage #4: Gives you a credible identity
Having “inc” or “corp” after your business name gives you credibility as a corporate entity. Additionally, since a corporation is its own entity, it can outlive you.
Depending on your field or industry, some customers or clients may prefer doing business with a corporation rather than a sole proprietor. And you may attract higher-quality employees.
Advantage #5: Gives you more options for funding
If you’re interested in attracting equity investors, you can raise capital by selling shares of corporate stock to grow your business.
What Are the Disadvantages of Incorporating?
Although there are many advantages of incorporating, there are also some disadvantages. The main downside is that there are fees to get set up and maintain your corporate status each year, which vary depending on the state where you do business. Plus, your annual tax preparation gets more complicated, and the cost may go up.
When Should You Incorporate Your Business?
The answer to when you should incorporate your business depends on many factors, such as your risk of getting into a lawsuit, your tax liability, the type of business you do, and your business goals.
If you’re engaged in a risky business—such as being a gym owner, having a dental practice, or selling edible products—you’ll need plenty of protection and should be incorporated, in addition to having business insurance.
But for other low-risk businesses, such as providing editing services or being a graphic designer, simply having business insurance may keep you safe and give you peace of mind as a sole proprietor, especially if you don’t have employees.
Since the needs of every business owner are different, and the tax law varies from state to state, set up a consultation with a business attorney or a tax professional to discuss all of the issues that should affect your decision to incorporate.
A good time to incorporate is at the beginning of a new year, so you avoid having to file 2 sets of tax records: one as a sole proprietor and one for the months following your incorporation. So, make it a goal to consider your potential liability in business and fully investigate whether you should incorporate your small business before the end of the year.
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