There comes a point in time when every small business person contemplates on whether to incorporate their business or not. A lot of times small businesses start out sole proprietorships, and then become incorporated as the business expands and develops. Small business incorporating can be a difficult decision, and with this article you’ll gain a little bit of knowledge on the advantages and disadvantages.
There are many advantages to incorporating your small business, but limited liability is one of the biggest advantages. When you have sole proprietorship to the company all the liability of the company is on the owner. When incorporating the business, your only liability is to however much you invest in the company.
With sole proprietorship, all of your personal belongings, such as car and home, can be turned over to help pay the debt of the business. As a shareholder in the business, you have no responsibility whatsoever for the debts of the business, that is of course unless you give a guarantee.
Another advantage to incorporating a small business is the ability to raise money so much easier. With the ability to raise money much easier, this increases the odds of the corporation growing and expanding. Yes, you’re saying any sole proprietorship can borrow money and incur debt like any corporation. However, with a corporation you can sell shares and raise equity capital, which is a big advantage in that you generally don’t have to repay equity capital and it has no interest.
There are many tax advantages with becoming a corporation that you can take a look at as well. Some of these advantages include income splitting, potential tax deferral and more. Along with the reasons above, a corporation can have an unlimited life. The life of a corporation is not dependent on particular individuals, but the company as a whole. With this, the company has the opportunity of lasting forever just as long merges with another company or goes bankrupt.
Now that I’ve buttered up the idea of incorporating your small business, let’s take a look at some of the possible negatives.
As you incorporate your small business, there now will be two tax returns to file each year, one for your personal income and one for the corporation. This may not be a huge deal, but unlike a sole proprietorship a corporation cannot deduct its losses from the personal income of the owner. Plus, having another tax return is the last thing another business owner wants to deal with.
As a corporation is much larger and more complex then a small business, therefore the cost to create one is much higher. Just to set up the corporation will cost a lot more, then you have to tack on the increased maintenance fees, accounting fees, and more.
As with everything else, a larger business means more paperwork that must be taken care of. Corporations must keep a minute book, which contains the corporate bylaws and minutes from corporate meetings. Reports and tax returns must be completed neatly and in a timely fashion. All of the business bank accounts and records have to be kept separate from personal accounts and assets. That may sound like a load, but that is just the start of the increased paperwork that comes with the territory of incorporating your small business.
While there are many advantages and disadvantages to incorporating your small business, the decision ultimately goes to you. It is a decision that could make or break your business, therefore much more research is recommended. However, small business incorporating should be a thing that suites you and others associated with you best.