What Happens If You Don't Incorporate Your Business?

Most small business owners start their company because they have a passion for something. There’s a certain group of people they’d like to serve or a certain product or service they’d like to provide. This enthusiasm can help an entrepreneur push through many of the headaches that come with starting a business.

Even so, while it’s important to focus on your big picture dream, you can’t forget about laying the proper framework for your company—which should include incorporating your business.

What Is Incorporation, Anyway?

Incorporation is the process of creating a corporate business structure, which allows your business to act as a legal entity separate from yourself. This gives your business the power to own property, pay taxes, and sign binding legal documents. There are a number of different structures to choose from, including a Limited Liability Company, Limited Liability Partnership, or Corporation. Each one has its own advantages and disadvantages, so it’s a good idea to speak with a lawyer or CPA to weigh your options and select the structure that makes the most sense for your company.

How Do You Incorporate?

In addition to consulting with an attorney or CPA, there are paperwork and requisite steps that come along with each type of business structure (take a look at the SBA website for more specifics), and the requirements vary from state to state. However, there are many advantages to incorporating, and a little bit of legwork now can save you a lot of headaches later.

Protect Your Personal Assets

The most important reason to incorporate is to provide yourself legal and financial protection. If your business ever finds itself the target of a lawsuit, if you’re not incorporated, your personal finances and assets are jeopardized (including your savings and home). Incorporating your business draws a clear legal distinction between yourself and your business and means that if any issues arise, only your company’s assets will be at risk.

Give Your Business Legitimacy

There are a lot of startups and small businesses out there, and customers or vendors find it difficult to know which ones to trust. If you’ve incorporated your business, it shows others that you’re serious about your company, understand how to run a business properly, and are operating above board. Without that air of legitimacy, there’s less that allows you to stand out from the crowd so you can cultivate new business relationships.

Gain Easier Access to Financing

Access to business financing, whether it comes from a venture capitalist or angel investor or from a traditional lender, is easier when you’re an incorporated entity. VC firms, for instance,  want to be able to establish shares that can then be divided up among investors and owners.

If you’re looking for a small business loan, incorporation allows you to apply for financing as your company, rather than applying as an individual. This means you can establish credit for your business and strengthen your company’s financial profile for future financing.

Protect Your Privacy

As an unincorporated business, any legal documents pertaining to your business will have to be filled out with your personal information. This means your name and address will be publicly available, and any legal or tax documents will be sent to your place of business. Part of incorporating involves designating a registered agent, which not only provides you with a level of privacy but also makes it easier to change the physical location of your business without having to file additional paperwork.

Seize Additional Tax Benefits

If you’re running your business as a sole proprietorship, you may be missing out on certain tax benefits and deductions that are available to incorporated companies. Incorporating may allow you to lower what you own in self-employment (SE) taxes and to take advantage of deductions associated with operating expenses, health benefits, and contributions to retirement plans. Again, each type of business structure comes with its own set of advantages and disadvantages, so it’s best to speak with a CPA to determine the benefits you might enjoy by incorporating.

While there are some costs and paperwork associated with selecting the appropriate business structure and moving forward with incorporation, the work is minimal when compared with the rewards you reap by taking that step. Give your business its greatest chance of success by committing early on to establishing a strong legal framework for your company.

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.