Incorporating a small business is a huge decision. Perhaps you’ve just opened your doors, and you’re doing well. On the other hand, maybe your small business hasn’t even gotten off the ground just yet. Either way, incorporating is a good decision for most businesses, and it’s not just reserved for those that are well-established. There are several benefits to incorporating your business in the United States, all of which you should fully understand before you decide what’s best for your business.
Here are 10 benefits of incorporating your business you should know before you take the leap.
- Protect your personal assets from creditors
- Protect your personal assets from lawsuits
- Tax benefits
- Easier to raise capital
- Build a better reputation
- Protects your brand
- Perpetual existence
- Easier to transfer your business
- Your business can grow after you’re gone
- Stronger record keeping
Set your retail business up for success
Retail isn’t dying, it’s changing. Our free guide will walk you through the future-proofing your business—a key to thriving in the new economy.
1. Protect your personal assets from creditors
There’s no doubt that starting your own business is exciting. But with that excitement comes the reality that accidents happen and (unfortunately) businesses sometimes fail. This is where one of the best benefits of incorporating comes into play. By incorporating your business as a Limited Liability Company (LLC), or a C or S Corporation, you are protecting your personal assets from business debts. If your business falls on hard times, your personal property is typically off limits to collection agencies. For example, you will not lose your home because you failed to pay your business loan.
If you haven’t incorporated your business, your personal assets are linked automatically to your business. This may include your car, your home, your investment accounts and even assets you obtain in the future. Additionally, if you were to file bankruptcy within your business, your personal assets could be used to repay your debt. If you were to file personal bankruptcy, your business could become an asset that can be liquidated to repay your debts. Incorporation protects your business from all of these scenarios.
2. Protect your personal assets from lawsuits
Keeping you and your family safe and secure is a huge benefit of incorporating a business. Without incorporating, your personal assets may be at risk to anyone filing a lawsuit against your business. That means if a customer trips or slips in your store and takes you to court to collect damages, you may be personally liable.
These individuals could try to collect on a judgment against you, for example, by taking possession of your home. Incorporation creates a solid barrier between your personal assets and legal claims against your business. If your business is sued, your personal and family possessions will generally not be at risk.
3. Tax benefits
Another benefit of incorporating your business, and one of the most crucial to leverage, are the many tax deductions that are available to incorporated businesses. When you go from being a sole proprietor to a business structure such as an LLC, there are numerous deductions at your disposal that are not available to individuals. Specifically, you may see tax benefits such as:
- The ability to spread out your losses over a larger period of time
- The ability to deduct startup and operational expenses
- The ability to deduct employee benefits
Your local and state taxing authorities may offer incentives to you more readily if you are a corporation. Keep in mind, however, that tax laws are complex and it’s best to consult a certified accountant before claiming any deductions.
4. Easier to raise capital
Incorporating generally makes it easier for your business to raise capital or apply for a loan by a sense of legitimacy to your business. When you incorporate, it also means you can open up a bank account and start building a line of credit, which, for a small business owner, is a necessity.
5. Build a better reputation
Your business’ reputation isn’t just based on the amount of Yelp and Google reviews you get or the good work you do within the community. Incorporating can help establish your legitimacy and build trust with potential customers. This is a huge plus for your business’s branding.
6. Protects your brand
Your brand is more than a logo or a marketing phrase. It’s the way you operate your business, the look and feel of your location and the type of products you offer. When you incorporate your business, you’re not just protecting its name. You’re also protecting the business’ overall image from being used in undesirable ways or without your consent.
Incorporation allows you to protect:
- Your business name (be sure properly organized does not register it before incorporating)
- Your brand recognition (visual cues like logos, slogans, and colors that represent your brand)
- Your trademark (any words, phrase, symbol or design that distinguishes your business from others.)
7. Perpetual existence
Legally, by incorporating, you can protect your business forever. Your business can still be sold or closed, but if neither of those things happen, your business will be in perpetual existence because it is its own entity. The business can remain operational and profitable, no matter what happens to those who are involved in the business. Here are a couple of reasons why that matters:
- It gives you the ability to create a long-term plan for growth within the business
- The business can remain operational without the need to reestablish itself multiple times
Perpetual existence becomes a powerful and necessary tool for any business that wants to establish a strong foundation from which to grow.
8. Easier to transfer your business
Let’s say that you want to pass your business on to your son or daughter as you get older, but only want to do so in the event of a sudden illness. It may be easier to transfer ownership and funds when the business is a corporation than it is if you are running a sole proprietorship.
Whether for short term or long term goals, your business will benefit significantly from incorporating for this reason alone. Transferring funds and business ownership is easier when the business has its own identity.
9. Your business can grow after you’re gone
When your business is a corporation, it is its own entity. It continues to exist even after you are gone as if nothing has changed. Your business will likely need a new head, but the business doesn’t halt.
You might be wondering if this still applies to those who plan on leaving their business to their heirs. The simple answer is yes. When a person passes away, their entire estate (which would include any businesses they own) generally goes through a probate court. The value of the estate is used to repay debts, including any mortgages, loans or medical bills they might have left after passing. Only after all of this happens does whatever is remaining pass to any heirs. That could be much less than the value of your business.
When properly organized, your business may not have to go through probate proceedings.
10. Stronger record keeping
When your business is a corporation, the U.S. government requires you to provide way more details at tax time. You’ll need to supply them each year, which may mean paying a bit more for a tax professional and detailed bookkeeping. Although additional record keeping is often seen as a disadvantage to incorporating, it means you’ll have a clear, accurate picture of the overall health of your business, which is a pro in our view.
Detailed records can help you secure a loan from a lender and give you insight into your expenses, your profits and where you can make key changes to improve the business’ financials. You can find some of this information in your POS system, but being diligent is usually a great move.
Think about your business, long-term
While it may not be necessary for all businesses to incorporate, most of the time, businesses do benefit from going through the incorporating process. Though it may seem like a daunting task at first, with numerous resources available to help you, it doesn’t have to be. It may not be as time taxing or expensive as you think.
Getting ready to open for business? Chat with us to find out how a cloud-based POS system can track valuable business data, so you can stay organized and grow your business more quickly.
Editor’s note: Nothing in this blog post should be construed as advice of any kind. Any legal, financial or tax-related content is provided for informational purposes only and is not a substitute for obtaining advice from a qualified legal or accounting professional. Where available, we have indicated the first-hand sources of the information contained in this blog post. While we strive to provide accurate content, we cannot be held responsible for any actions or omissions based on such content. Lightspeed does not undertake to complete further verifications or keep this blog post updated over time.