Owning a small business can be a risky venture. At one point or another, you may decide to make changes. One change you may consider is to incorporate your business.
Of course, you may be asking, “Why should I incorporate my business?” There are several benefits that come with incorporating a business. However, there are also various disadvantages.
Read this guide to learn more about the pros and cons of incorporating a business.
Pro: Protect Your Personal Assets
Incorporating a small business gives owners the ability to protect their personal assets. Keep in mind that a corporation can be liable for certain issues. If there is a problem, the corporation can be sued.
However, after incorporation, a business becomes a separate legal entity. Then, if your business is sued or incurs debts, creditors will not be able to go after your personal assets. They can only seek to collect payments from the corporation.
This allows you to conduct business without putting your home, cars, or other property at risk. You can incorporate your business as an LLC or an S Corporation to keep your personal assets off-limits. Basically, do this to unlink your personal assets from your business.
Incorporating your small business may allow you to lower your tax bill. This is because tax deductions are available for incorporated businesses.
You may be able to deduct employee benefits. You may also be able to deduct startup and operational expenses. Speak with your tax advisor to see what tax benefits you can access by incorporating your business.
This is one of the great benefits of incorporating a business. To reap this and the other benefits of incorporation, you should set up an LLC. If you’re looking to set up a corporation, do so through a cheap LLC.
Con: You’ll Have an Administrative Burden
Yes, there are disadvantages that come with incorporating a small business. For example, owners who incorporate a business will have an administrative burden on their hands.
The owner of a corporation must file legal and tax filings every year. Therefore, incorporating may not be suitable for all owners. It can take up a lot of attention and commitment.
Con: There Will Be Ongoing Costs to Keep an Eye On
On top of the administrative burden, owners of a corporation must deal with a lot of costs. For instance, every year, owners must pay state fees in the form of taxes. These fees can range anywhere between $500-$800.
Additionally, a corporation that does business in different states must pay these fees in each state where they do business. Imagine having to make sure you pay the right amount of fees to avoid any issues.
Plus, there are also federal income taxes. Then, on top of taxes, owners must pay accounting and tax filing fines if they don’t pay their taxes on time. Obviously, the cost of maintaining a corporation can add up.
Let’s say your business suffers financial losses. But if your business is incorporated, you may find yourself having a hard time managing your losses.
Under a proprietorship, owners can deduct their business loss against other personal income. But owners of corporations can’t do this. They can only apply the loss to a corporate tax return to reduce tax within the company.
The ripple effect of deep financial losses can also take a toll on others. For example, as a sole owner, if you experience any financial losses, it will fall on you and only you. In the case of a corporation, such losses can affect stakeholders, too, as they can lose their money.
Additionally, your employees can lose their jobs. This will affect them and their family.
What happens if you want to dissolve the corporation? Well, it’s not an easy process. If you’re seeking to do this, you face a long list of things to do.
There will be a lot of paperwork to go over. If you aren’t a fan of paperwork, you should avoid incorporating your business. In the worst-case scenario, you may even have to seek legal counsel to complete this process.
Should I Incorporate My Business?
If you’re thinking about incorporating your small business, you really should consider it. But ask yourself, “Why should I incorporate my business?”
Think about the pros and cons of incorporating a business. It may be in your best interest to do so.