Should You Incorporate Your Small Business?

by on April 1, 2013

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.

{ 19 comments… read them below or add one }

Sandra from veterinarian las vegas April 8, 2013 at 12:34 am

“True! Incorporations really makes our business a bit more legitimate-looking. It is inded a big help just as your post! :)”

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Aayna from seo jaipur April 8, 2013 at 3:59 am

Everything has its pros and cons, and so is valid with the process of incorporation of a small business. With incorporation, there are the additional costs but it also brings with it the glory of legitimate transactions. Thanks for the share.

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Lee April 8, 2013 at 1:00 pm

Hi
You touched on exactly why I changed from being a sole trader over to a ltd company as a sole trader I was worried about what I had already gained through my hard work and did not want it at risk . So I changed to a ltd company so I only have at risk what is in the business. Helps me sleep soundly.

Great advice lee
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Fatima from print estimating software April 9, 2013 at 4:11 pm

Many people seem to overlook these rightly highlighted disadvantages of incorporating their business. Online businesses are flourishing more rapidly so why not opt for those. Thanks for sharing.
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Calra from bamboo screening April 11, 2013 at 2:05 am

I personally think that incorporating our small business will do it some positive outcome. And also, there is a posibility that customers will trust our small business more. 🙂

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Dan April 11, 2013 at 6:51 am

I have been thinkin about opening a business myself. Reading this, I have learned some new things about business which will definitely help me later when I will probably need to make good use of them. Thank you for sharing this! Cheers.

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Arianne April 14, 2013 at 3:06 am

I guess it is helpful to incorporate our small business. We just have to keep in mind that we ought to search for the right ones to incorporate our business with.

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Jessy May 3, 2013 at 1:50 pm

How hard is it to start your own business? I know that the different aspects of doing the work can be tough, but how hard is it to actually file all of the paperwork and such?

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Lena jacob May 7, 2013 at 6:13 am

Incorporating a business online is not something people usually think of
doing. There are definitely tax and liability advantages to do this,
but most people who are making money at home, forget to consider
incorporation. It’s actually quite easy to do and much, less expensive
than one would think.

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Nia May 10, 2013 at 5:00 am

Hi,
Very realistic article, Interesting to read. this is really helpful to incorporate the small business. the reasons which you mention that are really pros for me. I think you have great knowledge about it.

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Mitch Carson June 10, 2013 at 1:34 am

Great Article. As a Newbie Blogger, I gained so much knowledge! Thank You so much for sharing all these valuable Information.

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BackFlip June 21, 2013 at 7:57 pm

I’ve been looking into this recently as a way to protect ourselves against loss. It seems that our society has gotten very “litigation happy” as of late. I would hate for us to lose everything that we’ve worked so hard to build.

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Johnstun Law July 26, 2013 at 11:34 am

Great post! I love finding new resources that make a complex aspect of small business law easy to understand. Well… easier to understand. It’s still not easy and does require the help of an expert, but still this is well written and straight forward. Thanks for posting!
Johnstun Law recently posted..When Affinity & Investing Mix: 5 Points to Detect an Investment ScamMy Profile

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Greg Holbert August 2, 2013 at 1:19 pm

Great post, Chris!

I never knew there where so many complexities to incorporating your business. Your post format made even the least business-savvy person(this guy) understand the pros and cons to incorporating your business. Keep up the great blogging while I have a look around at your other posts!
Greg Holbert recently posted..IRS Employee Charged with Laundering Drug MoneyMy Profile

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John Douglas September 8, 2013 at 1:24 pm

To know if you should incorporate your particular business it is best to consult with a legal professional. Incorporating can lead to added expenses that may or may not be necessary.

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Carl February 21, 2014 at 4:19 am

i agree with @ Aayna….everything does have it;s pros and cons.

i think though, that for the very ambitious small business owner, they should incorporate their business sooner rather than later and then really push to make sure the advantages of it are much higher!

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Richard Thompson from Printing Mountain View March 31, 2014 at 2:58 pm

I think depending on the size of your business, incorporating is the safest thing to do to protect your own assets and protect your family. The best advice you can give anyone considering this though is to do their research. You have to be prepared for the fees and costs associated with hiring on the right legal team and consultants, in addition to the tax changes. Great article!

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Adam May 15, 2014 at 6:11 pm

You can maximize the value of incorporating with the help of a CPA. There are ways to divide your income from the corporation between employment wages and shareholder income that can reduce your tax liability.

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Rheena Suryani May 25, 2014 at 12:54 pm

Hi Chris,
It’s always fun when reading something written by someone who expertise in a particular field, just like you. Thanks for this great article, you make my eyes wide open.. 🙂
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