Incorporation means taking your business to a new level that can provide numerous benefits. Essentially, when you incorporate a business, instead of remaining in a partnership or a sole proprietorship, you establish the business as an entity separate from you. As a corporation, you may get tax benefits, reduce your liability toward the business’ debts, be able to more appropriately value your company if you plan to sell it, and may be able to more effectively raise money.
Typically, the number one reason for choosing incorporation is that it limits your personal liability. Provided you do not commit illegal or negligent acts while running the business, you are not staking your personal property if you find yourself with debts you can’t handle or a lawsuit that threatens your personal assets. Incorporation provides protection.
People can sue your business, or they can attempt to collect debts from your business, but in most cases, whatever you personally own cannot be taken for debt collection or to pay off lawsuits. Since incorporation provides you with an entity, which is the business, many people like the feeling of asset protection. The business is not you, even if you run it, and therefore you are not in most cases liable if the business fails.
By establishing a business through incorporation, particularly a small to mid-size one, you may be eligible for a variety of tax breaks. These may not be the same or available to you if you run a non-incorporated business from your home or have a sole proprietorship. A good accountant can help you weigh which tax benefits might be available to you if you incorporate. Further, a corporation, even a small one, may be eligible for cheaper rates on things like health insurance. With more and more states requiring that all full-time employees be insured, having corporation status may help ease the pain of high health insurance costs.
When you have a public, for profit, corporation, one of the ways you can raise money is by selling shares. A single owner of a business does not have this money-raising potential. If you’ve got a great idea for a business, offering shares in your company allows for you to raise more money to fund your efforts. You can benefit not only yourself but investors in your corporation should your business become successful.
Selling your business is difficult to do without shareholders, since it may be hard to gauge the value of the business. An incorporated business tends to be easier to evaluate from a price standard, since you can not only show earnings, but also the investment opportunities and interest of shareholders. Generally, a business that incorporates may sell for a higher price than would a partnership or solely owned business.
There are some disadvantages to incorporation. You’ll have to spend time to solicit and answer to shareholders, have a fully operational board of directors, and you’ll have less power in your company. In large very profitable businesses, sometimes people who originally started the business can lose their jobs as directors if the shareholders or board members vote them out. People who prefer to work alone, don’t hire employees, and don’t have significant assets outside the business may not want to go the incorporation route because to do so means they won’t have total control over their business. If you don’t play well with others, and don’t mind risking your assets, incorporation may not be right for you.