Incorporating a business may seem overwhelming. The word brings up large corporations, giant office buildings, and suits, but believe it or not, incorporation is not just for large businesses. Deciding to incorporate a business is not just about the size or scale of a business, but more about your long-term business goals.
Since a lot of small businesses start companies as a sole proprietorship, they may feel like the leap to an incorporated business will separate them from the business. Or they’re unsure what an incorporated business actually means. But deciding to change to a corporation or LLC can offer a number of advantages for business owners and entrepreneurs.
What does incorporation mean?
Before we talk about the advantages of incorporating your business, let’s define what it actually means.
Incorporating a business means it is set up as its own entity recognized by the state. To be clear, incorporating a business is not the same as registering a business. When a business is registered, the state is notified of the existence of the business so it can operate legally. When a business becomes incorporated, it creates a separate legal entity for the business. When you operate as a sole proprietor or general partnership, there is zero separation between your business and you. This can mean your assets can be liable for business taxes, credit, debt payments, or money owed in a legal dispute. But an incorporated business is separated from a sole individual’s assets and becomes its own legal entity.
However, incorporation does not change how the business is taxed. Legal entities recognized by the state are recognized differently by the federal government. For example, the state sees single-member LLC as a legal entity, whereas the IRS classifies it as a disregarded entity and is taxed as an individual. How your business is taxed by the federal government is dependent on the type of legal structure you choose. If you decide to incorporate your business, there are three options to choose from:
LLC (single-member or multi-member)
Each incorporation has its own tax stipulations, and you’ll want to speak to a tax professional about which option is best for your business.
The Advantages of Incorporating Your Business
If you decide that it’s time to incorporate your business, here are some of the advantages:
1. Personal asset protection
One of the biggest advantages of incorporating a business is that corporations and LLCs allow owners to separate their personal assets from their business. As long as a corporation or LLC is properly managed and organized, business owners should have limited liability for business debts.
2. Continued existence
LLCs and corporations can continue to exist in the eyes of the state and federal government even if the management or owners change. Sole proprietorships and partnerships end if the owner passes away or leaves the business.
3. Boasted credibility and protection
If you decide to incorporate your business, the attached “Inc.” or “LLC” lends authority and prowess to your company. Potential clients, consumers, and partners tend to prefer incorporated businesses. Plus, other companies cannot use the same name as your corporate business name. This helps establish your brand and benefits marketing.
4. Tax flexibility
While an LLC or corporation is not necessarily taxed differently than a sole proprietorship, they do provide limited exposure to an owner’s personal assets. And while profit and loss statements do pass through an LLC and are reported on the business owner’s personal income tax returns, an LLC can also elect to be taxed as a corporation. Once a business owner incorporates their business, they’re taxed on an individual and corporate levels. But a corporation can prevent being doubly taxed on corporate profits by choosing Subchapter S tax status.
LLCs and corporations may deduct business expenses, such as employee salaries, before paying income to business owners.
Businesses of all sizes can maximize their success by choosing the right corporate structure. Think about the long-term goals of your business and don’t let the process intimidate you. At Dominion, we can help your growing business with professional payroll and Modern HR software.