Should You Incorporate Your Business?

Ask most business owners why they chose to be a sole proprietor or incorporate their business and most of them will give you blank stares before mumbling that it was recommended by their attorney or CPA. Others may have a vague idea but wouldn't be caught dead trying to explain it to their peers at their local Chamber of Commerce.

There are multiple ways to structure your business so that you have different advantages when it is tax season or if you run into legal problems. From partnerships to limited liability corporations you should have an idea of how you want your business to be structured before visiting your legal and financial team. Then they can give you comparative figures of how each entity structure would affect your business and together you can make an informed choice.

Sole Proprietorship: One business owner

Pros

• Easy to form, just pay to file your business name or DBA (Doing Business As)
• Apply for necessary permits and certificates (ex. Seller's Permit if a retail business)
• Easily make business decisions
• Doesn't require government approval
• Cheapest business type to start and close

Cons

• Owner's assets are at stake if he/she is held responsible for any liability
• Limited set of skills, time, social contacts and money since it's only one person
• You are the business, so if you get sick it could mean major problems
• Personal credit rating is affected if you default on bills

Partnership: Two or more business owners

Pros

• Partners can pool start-up funds
• Easy to form and end (provided there is a partnership agreement)
• Expanded set of skills, time, social contacts and money

Cons

• May be harder to get consensus on business decisions
• What will happen if the partnership doesn't work out?
• Possible conflict since there are different personality types

Limited Liability Corporations: Protects you from personal liability

Pros

• The owners can't be held personally liable for the debts or liabilities of the company
• Easier to get a bank loan since it is a corporation
• Corporate tax benefits
• Personal tax benefits
• Easier to transfer ownership
• May be easier to secure bank financing

Cons

• More paperwork
• Attorney will be needed to examine or prepare documents
• Not as easy to end the business

Subchapter S: Fewer than 75 shareholders

Pros

• Isn't taxed twice (once on corporate profits and again when stockholders receive dividends) like C corporations
• Financial losses can be deducted in its entire amount (instead of a limit of $3,000 max per year) when filing personal taxes
• May be easier to secure bank financing

Cons

• Same as the limited liability corporation's cons

Whatever you decide is best for your business, be sure to consult experienced business owners in your field and experts so that you don't regret your decision later.