Should you incorporate your business? Is it really necessary to incorporate if you want to run a business? As the leader of a business that specializes in document filing services, I hear the first question asked quite a bit by new and existing entrepreneurs alike. My answer is always a resounding ‘Yes!’ — and not just because it’s what I specialize in doing, either.
The second question is a little trickier to answer. In theory, you don’t have to incorporate a small business. Some entrepreneurs have side hustles that they choose not to incorporate. The reasons for this may vary. The gig, for instance, could be a side project you’re passionate about, but don’t make much money from or have a desire to expand into working on full-time. Another reason could be the incorporation process itself. This is often viewed as too time-consuming and boring to do… so entrepreneurs avoid doing it. However, entrepreneurs may not realize just how many benefits they’re missing out on simply because they chose not to incorporate.
Should you incorporate a business? Yes! Is it really necessary to incorporate? Also, yes! Let’s talk about all the great things you (and your business) gains from getting started.
If you decide to form a limited liability company (LLC) or corporation for your business, these entities ensure that it receives liability protection.
What does this term mean, exactly? Liability protection maintains a separation between your professional and personal assets. If your business was delinquent on its debt, liability protection would ensure that personal assets, like houses and cars, were not impacted outside of the business.
Are there any entities that do not provide liability protection? The most prominent one is a sole proprietor. Many entrepreneurs incorporate under this entity due to its affordability. Acting as a sole proprietor also ensures that you, the business owner, are in control of the business. This kind of responsibility, however, means that any and everything that can happen — from accidents to product damages — holds you fully accountable. If the thought of unforeseen circumstances keeps you up at night, you may consider switching entities for liability protection.
How do you feel after you’ve done business with a company that had an “Inc.” or “Corp.” in its name? There’s a bit of added trust that comes with shopping or investing with these types of businesses. Incorporating gives businesses an added boost credibility. This legitimizes the business, making it a win-win for both the company’s reputation and the trust customers are able to quickly establish with it.
Understanding The Structure Of Your Business
It’s not uncommon for an entrepreneur starting a business to ask themselves what type of business they want to own and operate. They have a pretty good idea of what their offerings will be and their given industry. What about the company’s legal structure?
Incorporating does more than provide liability protection, potential tax savings, and establish credibility for a small business. It also provides them with an entity that helps structure the company.
Let’s take a moment to compare and contrast what it means to incorporate as an LLC versus a corporation. An LLC provides a bit of added flexibility in its legal structure, such as the ability to choose an S Corporation as its tax entity. Forming an LLC is also ideal for small businesses that wish to stay small and independent. In the event that you choose to expand and would like to take the business public, you do not need to remain an LLC forever. You may change the entity to a public legal structure like a C Corporation when the time is right.
Corporations, on the other hand, are much more strict legal structures. Entrepreneurs that choose to incorporate as a corporation usually have big plans for their business, like raising capital, going public with an IPO, and expanding worldwide. A corporation would be the ideal entity for this kind of business structure. It allows entrepreneurs to accept money from investors, issue stock, and still keep the company protected through liability protection.
Incorporating Is Just The First Step!
Understanding the entity you want, and need, before incorporating your business ultimately provides it with a great foundation for success.
Don’t forget that you’ll need to check a few legal items off your to-do list after incorporating, too! Apply for basic business licenses that pertain to your company and its offerings, business insurance, an employer identification number (EIN), and any trademarks or copyrights necessary to protect your intellectual property.
Deborah Sweeney is the CEO of MyCorporation.com which provides online legal filing services for entrepreneurs and businesses, startup bundles that include corporation and LLC formation, registered agent services, DBAs, and trademark and copyright filing services. You can find MyCorporation on Twitter at @MyCorporation.