When you think about incorporating your business, do you scoff, “Not me. I’m just a one-person/home-based/part-time business—incorporation is for the big guys”? If so, it’s time to rethink your attitude. You see, every small business—no matter how small or informal—needs to be incorporated.
That’s because no matter how small or informal your business is, you could be sued. Suppose your business isn’t doing well, you can’t pay a business debt and the creditor takes you to court to get their money back. Perhaps you are a children’s party planner, a child is injured during a birthday party you organize at a local park, and the parents decide to sue you. Or maybe you own a one-person accounting firm and, after you make a mistake on a client’s taxes that costs them a lot of money, they sue you for the damages.
In any of these cases, unless your business is incorporated, all of your personal assets could be at risk—including your savings, possessions and even your family home. And even if the lawsuit is baseless, you still have the legal costs involved in defending yourself in court.
If you haven’t done anything to determine a legal form for your business, and you are the only person in your business, by default you’re considered a sole proprietor. Even if you have a partner and the two of you have formed a general partnership, your personal assets still are not protected.
Why does incorporating provide so much protection? When you incorporate your business, you are creating a new legal entity that’s separate from its owners. If your corporation owes a debt or if it is sued, the business—not you personally—is liable.
Incorporating has several other advantages:
- It makes it easier to separate your business and personal finances, which has tax advantages.
- It helps you establish a credit score for your business so you don’t have to rely on your personal credit score.
- If you think you might ever need to get a business loan or look for investors to help finance your business, being incorporated will help there, too.
- Being able to put “Inc.” or “LLC” after your business name just looks more professional, which can make customers and clients feel more confident doing business with you.
There are several different forms your business can take when incorporating: a C corporation, an S corporation, or an LLC (limited liability company). Here’s a quick overview of the differences:
- C corporation: A C corporation pays federal income taxes. However, any dividends paid to the owner (or other shareholders) are also taxed. This is sometimes called “double taxation,” and the S corporation form was created to help avoid it.
- S corporation: An S corporation doesn’t pay federal income taxes. Any income or financial losses pass through to the owner and get reported on his or her personal tax returns.
- LLC: Limited Liability Companies have a more flexible management structure than C or S corporations, while still protecting your personal assets. Any profits or losses from the business will be reported on your personal tax return.
There are some costs associated with incorporation, as well as some paperwork you’ll need to complete every year. However, when you consider the risk to your personal finances that could arise from not incorporating, the cost is well worth it.
Find out more about corporation business structures. To take advantage of all these perks, incorporate your business with CorpNet today!