Do you have to incorporate your business?
Whether you run a small business on the side while working full-time for an employer, or you work full-time from home, you may be considering the benefits of incorporating your business, or trying to determine what your legal responsibilities are.
Depending on what your business is, you likely are not required to incorporate it. If you are running the company yourself – as many entrepreneurs do, especially in the beginning – you are free to operate as a sole proprietorship, using your social security number for tax and licensing purposes.
However, there may be some benefits to incorporating, depending on the characteristics of your company. Here are a few reasons you might consider incorporating:
If you started your business with another person (or people), or you added partners along the way, then incorporating will help you to establish a formal procedure for sharing revenues and other equity.
No matter how you choose to incorporate, doing so will limit your personal liability for any losses suffered by the company or judgments made against it. If your company is sued, or becomes at risk of going bankrupt, your personal assets could be protected.
In some cases, you would only lose your initial investment. In other cases, you may only be liable for the same percentage of damages that you have invested in the company.
There are some tax advantages to incorporating your business, and these depend on complicated calculations that factor in your profits, personal income, payroll taxes, and more. It is not always advantageous to incorporate – as it may cost you more in taxes, depending on your circumstances.
Talk with a tax professional who can analyze your individual circumstances to tell you how incorporating might offer you some advantages.
It is often more easy to raise capital if you are incorporated because there are more options available to you. For example, you can issue stock or raise equity capital, which does not have to be repaid. You also look more professional when you approach investors as an incorporated company rather than a solo entrepreneur.
While you can hire contractors or freelance employees as a solo entrepreneur, there are many advantages to incorporating in order to hire employees or enter into contracts with third-party vendors. Incorporating helps you to limit your liability and gain tax advantages.
Of course, if you are a solo entrepreneur, if something were to happen to you, your business would be over. If you incorporate, your business will live on long after you. Ownership of a corporation can be transferred, and corporations have an unlimited life span.
These are just a few of the reasons why you might want to consider incorporating. You should talk with a tax professional or an attorney to get a better understanding of how laws apply to your particular circumstances and what the benefits of incorporating might be.
Did you choose to incorporate your business? Why or why not? Tell us your thoughts in the comments!
Alexis Bonari is a freelance writer and researcher for CollegeScholarships.org, where recently she’s been researching homeschool scholarshipsand college scholarships. In her spare time, she enjoys square-foot gardening, swimming, and avoiding her laptop.