The advantages of incorporating your business
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More often than not, small businesses begin their lives with one person, an idea and the simplest of all company structures: A sole proprietorship.
One key advantage of the sole proprietorship structure is its simplicity, especially when it comes to paperwork. For example, the company’s tax information is reported on the owner’s personal return.
Incorporating to grow your business
But entrepreneurs with big dreams shouldn’t wait too long before they examine the benefits of incorporating their business. If you want to grow and hire people, a corporation is by far the preferable structure.
Most businesses convert into corporations as they grow because this structure offers several advantages over sole proprietorships.
- ownership stakes are easier to transfer
- owners benefit from limited liability
- the life of the corporation can extend beyond that of the founder(s)
Easier ownership transfers
A corporation is a separate legal entity and owners do not own its assets directly. Instead, they own shares in the corporation, which in turn owns the assets. This makes transferring ownership stakes much easier.
The ability to transfer ownership, in turn, makes it much easier to attract investments. Venture capital firms and angel investors, for example, like to know they can get in and out of an investment on pre-agreed terms without the inconvenience of a muddled organizational structure.
Limited liability means the owners are not personally responsible for the obligations or acts of the corporation within legal limits. And potential financial losses are limited to the amount invested in the corporation, except if the owner has provided a personal guarantee, which many banks require.
The other key advantage that incorporated businesses have is that they benefit from a theoretically unlimited lifespan. When shareholders die, their shares are passed on to their heirs or are transferred via a sale.
Sole proprietorships on the other hand automatically dissolve when their principals pass away.
An instant dose of credibility
Incorporating your business can provide an instant dose of credibility to your business. Potential investors, lenders, suppliers, customers and employees all get an immediate signal that you are serious and thinking about the longer term.
That said, incorporating a business does require some additional cost and effort. For one, a corporation needs to maintain a separate set of accounting records, distinct from those of its owners. Corporations must also pay annual registration fees and must file separate financial statements and tax returns.
However, these inconveniences are well worth the effort if your goal is to grow your business into a sustainable, long-term operation.