Starting your own business comes with a significant amount of responsibility, but there is a way to avoid some liability a business may bring. Incorporation can be advantageous for many business owners, but understanding what that means for you and your company is crucial before deciding how to proceed.
Incorporation V Sole Proprietorship
There is a substantial difference between an incorporated business and a sole proprietorship. If you start a sole proprietorship, you and your business will be treated the same from a legal perspective. One primary concern for many entrepreneurs is the level of exposure they face in this type of company structure. Operating as a sole proprietor means you may be held personally liable for business debts and lawsuits.
The process of incorporation provides protection to business owners by keeping their personal finances and assets separate from that of the company. Incorporating a business protects the owner from personal liability for business issues and provides greater flexibility when handling excess profits. Incorporation also offers many other advantages.
The Benefits of Incorporation
The process of incorporating a business is more complex than that of a sole proprietorship, but a little more time and effort spent in the beginning can be beneficial in the long term.
Asset Protection
Incorporation allows you to avoid liability and protect your personal assets and finances. Corporations must be structured and managed in a way that aligns with certain formalities and legal requirements, but this is what enables owners to maintain their personal protection.
Credibility
A new business often has to work extra hard to establish itself as a credible source in its industry. Earning the public’s trust is no easy task, but incorporated status can lend automatic credibility to a business. Potential clients and customers often see a corporation or LLC as a highly professional and respectable entity.
Funding
When you operate a partnership, LLC, or corporation, it can be easier to obtain funding from lenders than it would be for an individual running a sole proprietorship. This is because banks prefer to lend money to incorporated entities, as their credibility is often higher than their unincorporated counterparts.
Boundaries and Roles
The process of incorporating a business requires owners to flesh out the roles and responsibilities of all the key players in the company. When you start your business as a corporation or LLC, you will need to establish the company’s structure, which allows everyone to understand the business’s goals, vision, and operation from the get-go.
Taxes
Many people believe that a drawback to incorporation is the requirement to pay taxes on both individual income and at the corporate level. However, this is not always the case. Double taxation is not required of S corporations or LLCs.
Even small businesses should consider the option to incorporate, but it’s understandable if yet another series of complex processes may be a deterrent for some entrepreneurs. At The Document People, we know that starting and running a business is a monumental endeavor. That’s why we offer our clients guidance and assistance with the paperwork and processes of incorporating a business. For a free consultation, call us at 760-754-9059, or email us at thedocumentpeople@att.net.