When you’re just starting out, it can seem like the easiest course of action is to run your business as a sole proprietorship or partnership. Incorporating can often mean consulting with a CPA or attorney, completing and filing paperwork with the Secretary of State, paying incorporation fees, and registering with the IRS.
This can feel like a lot of extra work when you’re already busy running a company. But there are many reasons why taking steps to incorporate can be worthwhile. We’ll explore seven of them below.
1. Protect Your Personal Assets
The most obvious reason to incorporate is to protect your personal assets. If you don’t incorporate, your assets and life savings are at risk if your business is sued or is unable to meet payments on its loans. However, once you incorporate, you’re establishing your company as a wholly separate entity.
Incorporating draws a clear and legal line between yourself and your business, which means that should any issues arise, only your company’s assets will be at risk.
2. Gain Credibility
When you’re just starting out, it’s likely that prospective vendors or clients will not have heard of your company. One way to stand out from the competition and potentially gain new relationships is to give your business an air of credibility through incorporation. When an “LLC” or “Inc.” follows your company’s name, it’s a subtle way to signal that you’re serious. You intend to create a long-standing company, and you’ve done your research to understand the fundamentals of starting a business.
3. Ensure Perpetual Existence
When your business is run as a sole proprietorship, the life of your business is dependent upon you. While it’s not always pleasant to think about, especially in the early stages, you want your company to endure if you leave for any reason, including death.
Incorporating allows your company to continue indefinitely until it either merges with another business or declares bankruptcy, regardless of whether or not you are still running the company.
4. Create Shares
Part of incorporating a business involves the creation of shares, which serves several purposes.
First, if you have a partner in your business, the incorporation process will allow you to clearly define how ownership is divided. This will help you avoid any disputes about equity down the road. Additionally, the creation of shares makes it easier for you to divest, should you choose to leave the business. Finally, cash can be tight when you’re starting a business. If you have shares, you’re able to offer equity as an alternative form of compensation to third parties.
5. Ease Access to Funding
Whether you’re looking for venture capital investment or are hoping to acquire small business loans, incorporating can make accessing funding an easier prospect. Venture capitalists often prefer to work with corporations, since they allow you to easily parse out equity in the company.
If you’re looking for financing from a bank or online lender, being incorporated allows you to apply for loans as your company. This means your business can begin to build its own credit profile independent of your personal one.
6. Add a Layer of Privacy
If you’re running your business as a sole proprietorship, you need to put your own private information—name and home or business address—on documents related to your company. Once you’ve incorporated, it’s the registered agent of your corporation that goes on record, replacing your information. Incorporating is a crucial step if you’d like your participation in a company to remain anonymous.
7. Take Advantage of Potential Tax Benefits
Corporations and LLCs often qualify for tax benefits and deductions that aren’t available to those who are running their business as a sole proprietorship or partnership. If you incorporate, you may be able to lower what you owe in self-employment (SE) taxes or be able to deduct things like operating expenses, health benefits, and contributions to pensions or retirement plans. However, the taxation of corporations is complicated, so it’s best to consult with a CPA or tax advisor to find out what tax benefits your company might gain by incorporating.
While the incorporation process can seem daunting, when you consider the benefits, it’s easy to see that they outweigh the costs. Consider carving out some time to begin the process sooner rather than later so that you are protected legally and are able to take advantage of the other significant advantages that come with incorporation.
Meredith Wood is the Editor-in-Chief at Fundera, an online marketplace for small business loans that matches business owners with the best funding providers for their business. Prior to Fundera, Meredith was the CCO at Funding Gates. Meredith is a resident Finance Advisor on American Express OPEN Forum and an avid business writer. Her advice consistently appears on such sites as Yahoo!, Fox Business, Amex OPEN, AllBusiness, and many more.