Starting A Business? To Incorporate or Not …

07/17/2010 by Michele R.J. Allinotte

Opening your own business can be a dream come true for many people. You are excited, you are passionate, you want to just dive right in and make it happen.

But let’s put on the brakes for a minute …

First, you need to consider how you should structure your business from a legal standpoint.  While starting out as a sole proprietorship and postponing any formal corporate structure may save initial start up costs, if you have a business that could be sued for any reason (and who doesn’t?), you may want to spend a little up front to save yourself from financial ruin in the event of a problem.

Incorporating your business can provide some protection to you personally in the event of a lawsuit against your business.

Here are just a few reasons you should consider incorporating:

1. Limitation of liability: A corporation is a separate legal entity from you personally.  Any debts incurred or lawsuits brought are against the company, not the owner (unless you have personally guaranteed the business debts).  Forming a business entity separate from you adds a layer of protection between your personal assets and potential lawsuits.

2. Attracting investment:  Trying to get financing for a small business as a sole proprietorship or partnership is difficult.  If you are going to seek out a line of credit or a business loan of any type, you may need to have a separate business entity established. If you are incorporated, you can offer non-voting shares to investors so they can share in the profits but you still maintain control over the corporation.

3. Taxes:   Another considerable benefit to establishing a separate business entity is the taxation of the company.  Depending on the volume of your business, incorporation may offer you some tax savings opportunities. Also, incorporated businesses tend to be audited less than unincorporated businesses.

4. Business Growth:  Are you treating your business like a business? If not, you are very likely not growing the business as well as you could – less clients, less income, less impact.  When you treat your business like a real business (and incorporating it is the first step), you will see your income grow.

5. Begin With The End In Mind: If or when you decide to sell your business, it will have to be valued in order to arrive at a selling price.  You can’t just pull a number out of thin air.  If the business is not separate from you, it will be extremely difficult to sell.  While starting your own business entity may be a bit more costly and time consuming in the beginning than just putting up a sign and opening up shop, it’s the key first step to having a real business instead of just creating another job for yourself -one that doesn’t provide any vacation days or sick time.


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