5 Reasons Why You Should Incorporate a Business
Choosing how to organize a business is probably one of the most important decisions that any business owner will ever make. As a business owner, incorporating your business may be the wisest decisions to make, but only if you prudently assess when to incorporate your business and your reasons behind it.
Funny enough, business owners cannot shrewdly answer the question; "when should you incorporate a business?" without the basic knowledge about the reasons why a business should be incorporated in the first place.
Here is a look at all the sensible explanations as to why and when to incorporate a business.
When to Incorporate a Business
Essentially speaking, incorporating a business refers to the process of making the business a separate entity from the owner. In other words, an incorporated business runs as its own entity free from the owner. The reasons for incorporating a business are clearly evident, but the problem arises for business owners in determining when the time is appropriate to incorporate.
The owner should consider incorporating the business when he/she has a strong feeling that it can successfully sustain itself as an independent entity from the owner and its employees. Therefore, a business can be incorporated when it is able to continue and sustain itself in perpetuity without the owner's personal assets, as well as personal inputs in terms of financial assistance.
Reasons Why You Should Incorporate Your Business
Personal Asset Protection
As a business owner, incorporating the business ensures that you are able to separate and protect your personal assets against any lawsuit or claims against the business entity. Personal asset protection that comes with incorporation ensures that business owners have limited liability for business debts and obligations; thereby cannot be widely affected in case of any form of lawsuit or claim against the business.
Enhancing Credibility and Brand Protection
Adding an "Inc" or "LLC" to the business' name through incorporation enhances its credibility. It is a stamp of approval that affords the business the authority and credibility that is widely associated with an incorporated company. This in turn, can lead to an influx of potential consumers, suppliers and partners preferring to do business with an incorporated company rather than with a business entity, which is not. Again, you should consider incorporating your business entity for the benefits of brand protection.
Tax Flexibility and Benefits
A plethora of tax advantages and benefits that your business is likely to get should be a genuine reason to consider incorporation. An incorporated business is taxed at the same rate as a sole proprietorship while still providing limited exposure to your liability as the owner of the business.
Typically, profit and loss of an incorporated business are reported on the personal income tax returns of the owner. On the other hand, it still gives the owner the flexibility of choosing to be taxed as a corporation. An incorporated business is likely to avoid being taxed on both the corporate profits and dividends by choosing Sub-chapter S tax class.
Generally, an incorporated business has the power to deduct all the normal expenses such as salaries and operation costs before allocating income to the owners. This becomes beneficial in the sense that there is a possibility of deducting the money you allocate for the business growth before determining the business' actual taxable income.
Incorporating your business comes with the guarantee that the business will continue to exist even if there is a change in ownership or management. This is contrary to sole proprietorships and partnerships, which seize to exist immediately when the owner dies or leaves the business. By incorporating the business, you ensure that its legacy is preserved beyond ownership and managerial changes.
To this end, it is easy to note that knowing when and why to incorporate a business entity is a crucial step in the life cycle of the business.
As a business owner, you should consider appropriate time to incorporate your business so as to enjoy numerous benefits that come with such incorporation.