Why You Should Incorporate Your Business

Different types of legal entities to operate as

When it comes to the kinds of corporations available to choose from, you get a small variety. There are three major categories that you can go for depending on your type of business and your preference. 

• Sole proprietorship 

As you start your business and register yourself, you’ll initially be known as a sole proprietor if you’re doing all this solo. Most small businesses start out like this. This is a great way to establish your business and take control of smaller segments in the market. However, as your business grows, this isn’t the ideal type of entity that you would want to be registered as. 

When it comes to a sole proprietorship, you are your business. This means that all the pros and cons that come with doing business are attached to you. The entire profit you earn goes straight into your pockets. The same goes for liabilities. You will be personally liable for everything. From expenses to taxes, you will have to personally deal with all of the details. 

• Partnerships 

Partnerships are different as they entail a business where you have about 2 to 20 partners along with you. This type of entity comes in two forms; general and limited. If the partners are in a general partnership, they are owners of all the liabilities and profits. Whereas, when there’s a limited partnership in play, then a couple of partners have limited liability, where they aren’t personally liable for the partnerships’ liabilities or the day-to-day operations. Many times, you’ll find angel investors and venture capitalists as limited partners in a partnership. 

• Corporations

Corporations are entirely different from the above two legal entities. These are separate legal entities that are owned by shareholders. In larger Corporations, the shareholders don’t directly overlook the regular operations. Instead, they hire directors to do this for them. Most of the time, corporations have limited liabilities, except some. This means that the shareholders or the directors aren’t directly liable for anything that happens in the corporation. 

When talking about corporations, there are two major types; C corporations and S corporations. C corporations have a varied number of share types and are focused on their growth. They receive various tax benefits based on the benefits they offer their employees. S corporations, on the other hand, are different when it comes to their taxing system. The corporation isn’t taxed; however, the dividend that the shareholders receive is taxed to a certain amount. 

Benefits of incorporating your business

If you’re confused about whether you should or shouldn’t incorporate your business, here are some key factors that can help you come to the right decision. 

• A better and easier way to raise capital

Incorporating your business means that you’re adding to your business’s name. Investors will have more trust in your business as they see that you are a verified corporation. Many investors tend to stay away from sole proprietors that don’t have a clear difference between personal and business operations. Expenses get mixed up and there’s often a lot of chaos, according to investors. 

Corporations are entities that investors avidly search for to invest in. Incorporating will, therefore, make sure that you’re able to get the right investment. 

• Limited liability

While this isn’t true for all corporations, most of them have limited liability. This means that if you are having trouble paying your debts, then no one is going to come banging your door for payment. The company is liable for all sorts of expenses and debt, so you don’t have to worry about taking them out from your pocket. You can always invest more since you’re going to be one of the business shareholders, but you won’t be liable to pay in most situations.

• Adds to your business’ credibility

Whether its customers or vendors, everyone wants to interact with businesses that seem legitimate. If your company is incorporated, then this is even better! Incorporating your business will add to your overall business credibility. There will be a possibility of more vendors and customers reaching out to you or wanting to work with you than before. 

This happens because your business appears to be more professional than before. Incorporating can really boost things up for your business’s name and credibility. 

• Perpetual existence

Sole proprietorships and partnerships typically end with the individual or partners. However, you don’t need to worry about incorporating coming to a halt with someone’s demise or any other issue. It continues until there isn’t a collective meeting of shareholders and the right process to dissolve the corporation. 

Shareholders keep on changing over a reasonable time, and your company will be able to live for a long time. They aren’t dependent on the initial founder of the business and have a perpetual lifetime. 

• Tax benefits

Corporations benefit when it comes to taxes as they’re able to save on them. As opposed to sole proprietorships and other partnerships, corporations get a lot of advantages when it comes to taxes. You can easily opt for a variety of deductions that will result in a low tax burden. Moreover, if you’re choosing a C corporation, you’re susceptible to a lower tax rate margin. When it comes to an S corporation, individual owners will not be liable to pay employment taxes and enjoy a relatively less strict tax system. 

• Better opportunities to sell 

At a certain point, you might think of selling your business. If that is something you want to do, Incorporating is a great option. You will surely have more opportunities than other types of businesses. With your business name and brand, you’ll be able to get a good offer. 

All in all, incorporating your business is likely to be beneficial for you and your business. While there’s a detailed process involved in creating a corporation, the result of it will be worth the while. Make sure you’re prepared for the process and know what you have to do before getting into it. If you are ready to get started check out our article “How to Incorporate for FREE!!!”