Pros and Cons of Business Incorporation

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Should you incorporate your business?

Starting a business can be exciting, satisfying, challenging, and a bit scary. Among all of the things you as a business owner must decide is if you want to incorporate your business. Business incorporation comes with many pros and cons, just like all aspects of owning your own business, and depending on the type of business you wish to own and your own personal goals, incorporation may or may not be the right move for you.

The Pros:

One of the biggest advantages of incorporation is the limited liability corporations receive. As a small business owner, you’re responsible for any and every lawsuit and financial issue that arises. If your company files bankruptcy, you lose. However, if you’re the owner of a corporation and the corporation files bankruptcy you only lose what you invested. So, if you put $1,000 in the corporation, then you only lose $1,000 in the bankruptcy. If the corporation is sued, you are not personally liable.

Other advantages include being able to get bigger loans than a small business and raising capital by selling stock in your company. While some people don’t like the idea of sharing their company, this, too, has an advantage. If you were to pass away, your company would live on through your shareholders. Your hard work would not go to waste just because you’re gone. If your shareholders passed away, their heirs will receive their shares and can keep the business going. As an owner, you can set up legal defenses that will make sure the corporation is run the way you wish even after you’re gone.

The Cons:

One of the cons of incorporation is obviously more paperwork than small businesses. Paperwork to start, paperwork to maintain, paperwork upon paperwork. You would need to hire someone to do your paperwork if you plan on running the business. Also, when starting and running a corporation, you would want to seek legal advice, and possibly pay attorneys to oversee monthly legal paperwork.

Tax issues are always a pro and con in any business. Sole proprietors must be responsible for paying taxes on all earned income in the business, but an owner of a corporation pays taxes through salaries. This allows them to pay less out of their own pockets. Corporations pay lower taxes than individuals. Corporations can deduct health insurance, business expenses, and more at a higher percentage rate that individuals and sole proprietors.

On the downside, corporations receive double taxation. The corporation pays taxes, then the shareholders (including the owner) are taxed on dividends. While this may not be so bad for larger corporations, smaller corporations and corporation owners could lose money on the double taxation. To avoid having too little or many taxes withheld a corporation owner should consult an expert.

Closing Thoughts

When deciding whether or not to incorporate your business, these are some basic pros and cons to consider. While there are others, the best thing to do would be to seek professional help from start to finish on making the decision to incorporate. It’s a big decision and involves a lot of details that’s best discussed with someone who knows about business incorporation.

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