Authored by Rodney Southern in Business Management
Published on 01-01-2009
Virtually every sole proprietorship or partnership eventually considers incorporating their business. Maybe the business has grown much larger, or maybe they think that the time is right for other reasons, but incorporation of your business seems sexy. The problem is, incorporation of your business is not for every business. There are only certain reasons to incorporate your business. This article is about those reasons you might consider incorporation.
One of the first reasons a person may incorporate their business is to lighten the liability load for themselves. An incorporated business allows you to only be held liable up to your investment in the business. This can be a huge relief to many sole proprietors that are risking everything they own by not incorporating. There are certain scenarios where a person can still be held liable even if the business is incorporated, however. This is still one of the main reasons that someone incorporates.
Also, expanding the business is much easier when it is incorporated. An incorporated business can sell off shares and raise money to expand. This money is interest free, and also does not generally have to be repaid. Of course, by selling these shares, you are giving away a portion of your company. This is one of the best reasons to consider incorporation carefully.
Being incorporated also allows you to have a much wider client base. Many clients or contractors will not work with sole proprietors, and having an incorporated business will get you some jobs in this way. Incorporated businesses are perceived to be more stable than a sole proprietorship or partnership as they go on even if the business is sold or the owner passes.
There are a number of financial reasons to incorporate your business. For example, you can take your pay when it is fiscally good to do so. You can pay yourself at the most opportune time with no repercussions. Also, the small business tax is often much lower than your own income tax rate.
While each of these are potentially good reasons to incorporate your business, you should also consider that many of them are liabilities for some. The costs of incorporating your business are significant, and they continue due to increased paperwork and man power hours required. The taxes are much less flexible in a corporation, and the liability is not as small as one might think for every situation.
When you are deciding to incorporate your business, take the time to sit down with your accountant or financial expert and figure out the specifics for your situation. This can be the most important reason to incorporate or not, and it is vital that you take the time to figure it out before acting. Sometimes, just the financial aspect is enough to help you decide one way or the other.