Should Small Businesses Incorporate Or Stay A Sole Proprietorship?
When a small business is starting out, the easier setting up is, the better. This makes business structures like sole proprietorship very appealing, especially for new business owners. Since the business and the owner have the same identity, the owner is held personally liable for their business.
As businesses grow and expand, or as business needs chage, a small business owner may want to change their business’s legal structure. This can happen for a variety of reason – the business few too fast, you want your business to have a separate identity, and more. It’s possible to change your business from a sole proprietorship to an incorporation, but is it the right choice for your small business?
What Is Sole Proprietorship?
This is a business structure where the business owner and their business have the same legal identity. This makes the business owner personally responsible for legal and financial issues related to their business. So if the business has incurred a debt, it’s the owner that has to pay for it from his own pocket.
Typically, a sole proprietorship is owned either by an individual owner, or with their spouse. It’s easier to set up your business with this legal structure, but there could be issues as well. For example, if you take out a business loan but can’t pay it back, you can lose your personal assets.
What Is An Incorporation?
The business structure of an incorporation on the other hand, offers various advantages that could be useful for a business owner. As an incorporation, you can either choose to be a limited liability company, or a C-Corporation. These are two legal structures that fall under the heading of incorporation.
The main benefit of incorporating your small business is that you get to create a separate identity for your business. This means that you are no longer held personally legally or financially liable for your company. This is no way means that you lose any shred of control over your business. Rather, it means that the government recognizes your business as a separate entity from you.
What Are The Benefits of Incorporating Your Small Business?
The tax and financial benefits that come with getting a business incorporated is a huge draw for potential business owners. If you register your business as a C-corporation for example, you get large tax deductions. Aside from this, you also have the boon of lowered corporate tax rates.
Here are the ways you can benefit from incorporating your company:
1. Protect Your Assets
Instead of your person savings, assets and belongings being affected in case there are business debts or loans to be paid, only the business is affected. This helps you separate your personal finances from your business funds.
This can be beneficial, in that it allows you to protect your belongings and lifestyle. Even if your business fails, you won’t end up losing a large portion of your assets.
2. Longevity
When it comes to incorporation, they are more durable than sole proprietorships. Businesses face changing market conditions, natural disasters, economic downturns, and other factors. Eventually, every business will have to deal with a risk factor.
Sole proprietorships can have a harder time with this, as they are completely reliant on themselves to make ends meet. If the business fails during such a time period, then they may have to close their doors for good. At the same time, being the same legal entity also affects the business owner’s personal finances.
Incorporating your company on the other hand, makes it easier for you to tide past bad times. Your personal finances and assets remain secure as well.
3. Loans and Financing
It’s also easier for you to secure a business loan as an incorporation. An incorporated company can approach a bank and find it easier to get their loan granted. This is because they appear as a more secure option.
Investors also tend to prefer financing incorporations over solve proprietorships. In a sole proprietorship business, finding loans can be more difficult. Sole proprietors don’t necessarily have to maintain a detailed record of their financial statements. While this is a good practice, for incorporations, this is necessary.
From available financial data, to the security of never having to worry about losing personal finances and assets, incorporating your company can offer many benefits.
Conclusion
Business owners that find that being a sole proprietor is affecting business growth can consider incorporating their business. As a sole proprietor, you can expand your company as long as liability does not become an issue.
If you run a business where you offer personal services, then incorporating your business can also help you. This is as their exists a risk that your business could get sued if your client loses money or don’t get their needs met. If you were a sole proprietor, this would be tantamount to you getting sued yourself.
As an incorporated business, you can protect yourself if this happens. Instead, your company can get sued, but you hold only a certain amount of liability. If you hire employees that offer services as well, then incorporating your business could be necessary as well. This is as a failure on their part to deliver quality service could result in you getting sued.
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