Most small businesses are run as sole proprietors. That is the way I have been running my blogs and Internet related businesses for the past ten years. However, I recently asked myself if it would make sense to incorporate my small business.
When deciding on whether or not to incorporate, it obviously makes sense to look at the pros and cons. Let’s start with the cons and then move to the pros.
Disadvantages of Incorporating Your Small Business
Off the top of my head I can safely say that the two biggest disadvantages are the cost and the increase in legal and tax complexities. The two disadvantages are somewhat related, as the more legal and tax forms you need to monitor and fill out, the higher the cost will be.
The cost of incorporating comes primarily from the legal and filing costs associated with filling out paperwork and having that information filed. Many people use lawyers to incorporate their business. This can be quite expensive in and of itself, especially if you write your own bylaws, or hire many people to help with the process, which can include finding a name that is not already taken.
Filing costs are the other major cost. Depending on the state or states you are doing business in, you may need to file forms with multiple departments and in multiple states. Some states are very business friendly (like Texas) and others can charge quite hefty fees.
The good news is that most of these costs can be mitigated if you use an inexpensive online solution to help you incorporate. Now, let’s turn to look at some of the advantages.
Advantages of Incorporating Your Small Business
By far the biggest advantage of having your business incorporated is the reduction in personal liabilities. If you run a sole proprietor you are personally responsible for your company. That means that if someone sues your company your personal assets could be part of the lawsuit, and you could have to pay damages from your savings or other assets.
However, if you are incorporated, there is a legal entity setup in your company’s name and the only assets at risk are the assets that belong to your company. This limitation on personal liability is one of the major reasons that small businesses form a corporation.
Other reasons that are also considered pros are:
- Being incorporated often adds legitimacy to your business
- It is easier to sell a corporation than a sole proprietorship
- Sometimes taxes can be more advantageous. If the corporate tax rate is lower than your personal income tax rate, like it is in Canada.
- It is often easier to get debt and grow your business if you are incorporated
- Similar to the point above, the business can be more easily transfered to a new owner or manager. This includes adding new stockholders or transitioning your business to a new family member.
Overall, incorporating your business if more likely a better idea than not. However, be prepared for some extra expenses when it comes to filing taxes and annual paperwork with the proper authorities. The first year may be a struggle but once you get the hang of it the time and money spent should decrease.
Let us know what you think about this by leaving us a comment below.