Should I incorporate my business? Benefits of incorporating

At some point during the life of a small business, you will be faced with the question of whether or not to incorporate your company. Incorporating comes with some additional costs, such as a typically higher startup fee and some ongoing state and federal tax liabilities, but for many businesses, the advantages of incorporating far outweigh the disadvantages.

Let’s take a look at some of those advantages so you can decide if they can benefit your business and offset the costs involved in incorporating.

Limited Liability Protection

Probably the most sought after aspect of incorporation is the limited liability protection that a corporate business structure provides. Without incorporation, a business owner is personally liable for any debt or contractual obligation of a business; If the business defaults on a loan and cannot pay it back, the owner is responsible for that debt.

However, when incorporated, your company becomes a legal entity, capable of entering into contracts and obtaining loans of its own. There is a layer of protection between you and the business, known as the Corporate Veil, and as long as you run the business properly, keep careful records, and follow federal and state rules and regulations, the courts cannot seize your personal assets to pay for the business’s defaults.

Reputation

Incorporating your business means you can put that valuable “Inc.” or “Corporation”. to the end of your company name (sole proprietorships, in most jurisdictions, cannot add a corporate ending indicating a different business structure than the one they have), and this means that the public can see at a glance that you are serious enough about your business to take it to the next level.

There is nothing wrong with being a sole trader, doing business under your own legal name. But some customers have a higher level of trust in registered corporations. It may not be fair, but it’s human nature, and by incorporating you can use this to your marketing advantage.

Longevity and structural integrity

When you incorporate, your business takes on a life of its own. If, God forbid, it should happen, your business can continue to survive and pass on to other owners.

However, in a sole proprietorship setting, if the owner dies, the business also ends. Since a sole proprietorship is directly tied to one person, there is no way to break those ties and reconnect with someone else. Certainly, a “successor” to the business can open a new business under the same name, but legally, there is no connection to the now-defunct sole proprietorship.

Also, unlike a sole proprietorship, a corporation allows ownership to be shared among many different people, up to 100 in the case of an S corporation; no owner limit in the case of a C corporation.