Incorporating a small business is a huge decision.
Perhaps you’ve just opened your doors, and you’re doing well. On the other hand, maybe your small business hasn’t even gotten off the ground just yet. Either way, incorporating is a good decision for most businesses, and despite popular belief, it’s not just reserved for those that are well-established. There are multiple benefits of incorporation, all of which you should fully understand before you decide to make your move.
Here are 13 benefits of incorporating your business you should know before you take the leap.
1. Protect Your Personal Assets From Creditors
There is no doubt that starting your own business is exciting. But with that excitement comes the reality that accidents happen and (unfortunately) businesses sometimes fail. This is where one of the best benefits of incorporating comes into play. By incorporating your business as a Limited Liability Company (LLC), or a C or S Corporation, you are protecting your personal assets from business debts. If your business falls on hard times, your personal property is off limits to collection agencies. For example, you will not lose your home because you failed to pay your business loan.
If you have not yet incorporated your business, your personal assets are linked automatically to your business. This may include your car, your home, your investment accounts, and even assets you obtain in the future. Additionally, if you were to file bankruptcy within your business, your personal assets would be used to repay your debt. And, if you were to file personal bankruptcy, your business would become an asset that can be liquidated to repay your debts. By incorporation you protect your business from this, probably one of the most valuable benefits of incorporating.
2. Protect Your Personal Assets from Lawsuits
Along with the protection from creditors comes protection from lawsuits filed against your business. Without incorporating, your personal assets remain at risk to anyone filing a lawsuit against your business. These individuals could try to collect on a judgment against you, for example, by taking possession of your home. That means if a customer trips or slips in your store and takes you to court to collect damages, you are personally liable. Incorporation, however, creates a solid barrier between your personal assets and the claims of others. That means if your business is sued, the safety of your personal and family possessions are not at risk. It might not be the most pleasant topic to address, but as a responsible business person, you never want to be caught unprepared. The benefits of incorporating lead specifically to keeping your business operational and the security of yourself and your family intact.
3. Tax Benefits and Money Savings
Another benefit of incorporating your business, and one of the most crucial to leverage, is the many tax deductions that that are available to incorporated businesses. When you go from being a sole proprietor or partnership to a business structure such as an LLC, there are numerous deductions at your disposal that are not available to individuals. Everything from tax deductions on health insurance and life insurance, to savings on self-employment taxes. Just remember, tax laws are complex, and it’s best to consult a CPA before claiming any deductions.
Specifically, you may see tax benefits such as:
- The ability to deduct business losses.
- The ability to claim some of your business investments.
- The ability to deduct travel expenses related to your business.
- The ability to deduct fringe benefits such as medical insurance.
- The ability to claim many daily expenses required to operate your business.
- The ability to deduct Social Security taxes that you’re paying into the system.
Also, your local and state taxing authorities may offer incentives to you more readily if you are a corporation.
4. Easier to Raise Capital
It might not be the most obvious of incorporating benefits, but it’s true that by incorporating, you’re making it easier for your business to raise capital. This mostly means that if you plan on borrowing money or applying for a loan, it adds a sense of legitimacy to your business. When you incorporate, it also means you can open up a bank account and start building a line of credit, which for a small business owner is a necessity.
5. Easier to Sell
We know that your business is your lifeblood, but let’s be honest, there might be a day when you decide it’s time to sell. As hard as that might be to envision now, it’s always best to prepare for the future. With this in mind, did you know that incorporating your business makes it easier to sell? That’s right! Sole proprietorships and partnerships are traditionally less attractive to buyers, so incorporating will give you a leg up on any competing businesses a buyer might also be looking at. You might ask why this is. Well, here are a few reasons.
- Easier to track and manage from an investor’s point of view than a sole proprietorship.
- Investors naturally feel as though corporations are more stable.
- Investors can view the business as its own identity, and that means being able and willing to make fundamental changes to it without infringing on your personal rights or needs.
6. Your Business Reputation Is Enhanced
Your business’ reputation isn’t just based on the amount of Yelp and Google reviews you get or the good work you do within the community (Though, that counts, too!) When you incorporate, you gain a sense of higher worth in the eyes of new customers. Your current customer base may be happy to work with you knowing what you’ve done for them previously, but new customers want a professional organization, further validating your brand image with customers.
7. It Protects Your Brand
Another benefit of incorporating your business has to do with your brand. Your brand is more than a logo or a marketing phrase. It’s the way you operate your business, the look and feel of your location, and the type of products you offer. When you incorporate your business, it is not just your name you are protecting. You’re also protecting the business’ overall image.
Incorporation allows you to protect:
- Your business name (be sure a third party does not register it before incorporating)
- Your brand recognition (visual cues like logos, slogans, and colors that represent your brand)
- Your trademark (any words, phrase, symbol or design that distinguishes your business from others.)
You’ve worked hard to build your brand and image. By incorporating, you can protect it from being used by others for their benefit.
8. Perpetual Existence
You might not be a hundred percent clear on what perpetual existence means, but it sounds good, right? Legally, by incorporating, you protect your business forever. It is important to know, of course, that your business can still be sold or that you may close it at some point. However, within the definition of a corporation is the business’ ability to remain in perpetual existence as its own entity. No matter what happens to those who are involved in the business, the business can remain operational and profitable.
Here are just a few of the many reasons this matters:
- It gives you the ability to create a long-term plan for growth within the business.
- Investors want to know that your business can go on without you, legally.
- It allows the business to remain operational without the need to reestablish itself multiple times.
That being said, perpetual existence becomes a powerful and necessary tool for any business that wants to establish a strong foundation from which to grow.
9. You Can Transfer the Business More Easily
Here’s one of the benefits of incorporating many people often miss. Let’s say that you want to pass your business on to your son or daughter as you get older, but only want to do so in the event of a sudden illness. It is easier to transfer ownership and funds when the business is a corporation than it is if you are running a sole proprietorship. Remember, in a sole proprietorship, all of your personal assets are linked to your business. It is not possible to easily value your business for a sale, or transfer it to another person until each of these lines of connections to your personal assets are defined and cut.
Whether for short term or long term goals, your business will benefit significantly from incorporating for this reason alone. There are some restrictions of course, but transferring funds and even business ownership is easier when the business has its own identity.
10. Your Business Can Grow Way After You’re Gone
Opening a local shop may be your passion and goal. But, ultimately, all business owners want their business to go on long after they are gone. If you own a sole proprietorship and you pass away, the business passes to your heirs. Your heirs are those named in your will or those who are your next of kin (your spouse, your children, etc). This happens regardless of their desire to own the business. However, this is another of the hidden benefits of incorporating.
When your business is a corporation, even though you still run it, it is its own entity. It continues to exist even after you are gone as if nothing has changed. Your business will likely need a new head, but the business doesn’t halt.
You might be wondering if this still applies to those who plan on leaving their business to their heirs. The simple answer is yes. When a person dies, especially without a trust protecting the business, the entire estate (which would include your business) goes through a probate court. Depending on your state’s laws, high taxation can occur on that estate. The value of the estate is used to repay debts, including any mortgages, loans, or medical bills you might have left after passing. Only after all of this happens does whatever is remaining pass to your heirs. That could be much less than the value of your business.
When you incorporate, this doesn’t happen! Probate does not touch the business directly. Instead, the business will go directly to its new owner.
11. It’s Easier to Establish Retirement Accounts
Today, many businesses provide retirement accounts, health savings accounts, and other benefits to their employees. Any business can do so. However, it may be less expensive and easier to establish tax-advantaged retirement accounts as a corporation rather than operating as a sole proprietor. There is less red tape in proving that the business is qualified to offer such plans to employees. Even if you operate the business alone, there are still advantages here for most business types, making this one of the more valuable benefits of incorporating a business.
12. More Record Keeping Keeps Things Honest
Perhaps one of the hidden benefits of incorporating has to do with record keeping. Although this is often seen as a negative, when you are a corporation, the government will want details, details, details. And you’ll need to supply them at tax time each year. This may mean paying a bit more for tax professional and detailed bookkeeping, but it also means you’ll have a clear, accurate picture of the overall health of your business.
As noted earlier, these records can help you obtain a loan from a lender and also, give you insight into your expenses, your profits, and where you can make key changes to improve the business’ financials. You could do the same thing without being a corporation, but most sole proprietors are too busy running their companies to invest the time and energy, unless there is a requirement like this in place.
13. You Gain Privacy
Perhaps the most important benefit of incorporating for some people, is the level of privacy that comes with incorporating your business. When you incorporate, you can keep your personal identity hidden. All of your business affairs are private and kept confidential unless you choose to disclose them. And, for many businesses, this type of confidentiality is necessary to ensure trade secrets are protected. Some states don’t even require your name to be on any business documents at all.
While it may not be necessary for all businesses to incorporate, most of the time, businesses do benefit from going through the incorporating process. Though it may seem like a daunting task at first, with numerous resources available to help you, it doesn’t have to be. You’ll find this business structure can enhance the way you do business from day one. With the benefits of incorporating so clear, most companies should take a much closer look. It may not be as time taxing or expensive as you think.