Incorporating Your Business

Written by Brenda Stokes for Gaebler Ventures

Why should you incorporate your business? Whether big or small, there are several advantages to incorporating that may be in your best interest.

Almost all small businesses owners consider incorporating their businesses.

Incorporating Your Business

However, there is a process to this. Most small businesses start out as sole proprietorships or partnerships and are incorporated as the business grows.

Once your business reaches a point in which you can incorporate, there are a number of benefits to doing so.

Advantage of incorporating

The first advantage to incorporating your business is the limited liability aspect. When your business is a sole proprietorship, you assume all financial responsibility. When it is a partnership, you and your partner assume financial responsibility. This means your personal assets can be seized in order to pay back debts associated with the business. Under incorporation, you are only liable for what you have invested into the business.

Continuance of your business is also another advantage because, usually, by the time you have incorporated you are established. Plus, a business can continue even if ownership changes.

Raising money is easier as well when you incorporate. This makes it easier for the business to develop and grow beyond your wildest dreams.

Income advantages

There are a number of income benefits when small businesses incorporate. For instance, you gain income control. This means you can have an actual tax advantage on the income that you receive. For instance, you can take your income when the tax penalty is less.

Also amongst income benefits is the tax deferral. You can defer paying some of your tax to a later date. You may even be able to take advantage of the small business tax deduction. This means that you can take a tax credit on the first $200,000 of the taxable income the business brings in.

Lastly, you can take advantage of income splitting. You can make your spouse and children shareholders, which allows you to redistribute income. This is the same as taking income from those in a higher tax bracket to those in a lower tax bracket, allowing them to be taxed at a lower rate.

Basically, these tax advantages are a part of being able to publicly trade your business. Public trading allows investors to buy shares, thus increasing the income potential of your business and increasing its longevity.

Disadvantages of incorporating your business

And just as there are advantages to anything, there are disadvantages as well. For instance, you have to file two tax returns every year. You have to file one for the business and one for your personal income.

Another disadvantage is the increased amount of paperwork. The documents that must be kept include a share register, register of directors, and a transfer register. A minute book that contains minutes and bylaws from meetings must also be kept.

You also have less tax flexibility when handling losses and you get no personal tax credits. Every dollar earned is taxed.

And last, registering your corporation can be expensive. The legal structure is more complex than a sole proprietorship or a partnership, so the fees start out in the hundreds of dollars just to set up the legal structure. How much it costs depends if you are applying at the state or federal level.

In the end, it is up to you to weigh the advantages and disadvantages against each other. You may find, however, that incorporating is a great move for you and for your business.

Brenda is a graduate of California State University and a professional writer covering a variety of business topics. To learn more about Brenda, check out her website at The Digital Inkwell.

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