Many businesses eventually become corporations. But the timing of such an action is different for each business. Here are some key points to consider about incorporation.
Although incorporating your business is not necessary to running a successful company there are many benefits to be gained by doing so. Incorporating a business can be done at the beginning of the life of the business or later when the business begins to grow larger. Although certain types of businesses can benefit immediately and protect the owners of the business by incorporating.
The Benefits of Incorporating
So what are some of the benefits a business receives by incorporating? For one the owners and officers gain a measure of protection for their personal assets. If the company defaults on a debt or is forced to file for bankruptcy protection the owners and officers cannot be held liable for that debt. But there is one stipulation to that rule. The owners and officers cannot give personal guarantees to secure such debt or financing. If they do they can still be held responsible for those liabilities that they guaranteed.
Your Business Has its Own Identity
Another benefit of being incorporated is that the business is legally a separate entity. Which means it can, over time, build up a credit profile of its own. And just like your personal credit the business will receive a credit rating. It is still up to you to help it develop a solid credit rating by managing the business’ finances correctly though. Just as you can score a high rating you can also destroy that rating too.
The ability to more easily raise capital is often a benefit of incorporation. Not only do potential investors prefer such a structure but more than likely your bank will as well. These entities want to see that you are serious about your business. Incorporating is a whole different level of commitment to the business from you and they should look more favorably on you because of it.
The Tax Game
Your taxes will be handled in an entirely different manner than if you run a sole proprietorship. Because the business is now a separate legal entity it is responsible for paying taxes on its earnings each year. This will lower your personal tax bill accordingly. And if the business loses money then such loses can be carried forward into the next year to help reduce taxes on any profits you might earn in the future.
It’s about the Long-term Future of Your Company
As you can see there are many benefits to incorporating your business. And these are just some of them. Is it absolutely necessary to do so? Of course not. It really depends on what you want the long-term future of your company to look like. If you are focused on growing the business then at some point in time it might be a wise course of action to consider, but if you intend to remain small it is not going to be absolutely necessary. It’s just a matter of what you feel is best for your business.