Advantages and Disadvantages of Incorporating a Business

Should I incorporate my business or not? This is one of the questions I get so often when I talk to my clients about the fundamentals of incorporating a business. So in this article, I will be sharing with you the advantages and disadvantages of incorporating your business.

Incorporating a business is one of the key questions to ask when starting a business but before I go into the pros and cons of getting incorporated, I want to draw a line between unincorporated companies and incorporated companies. Unincorporated businesses cover sole proprietorships, or businesses which have exactly one owner, partnerships or businesses which have two or more co-owners. In the unincorporated setup, the owners of the company are the business themselves; while they get a share of business profits, they also expose themselves to a large degree of responsibility for all the liabilities and debts that strike down a business. Therefore, creditors can take over personal assets in case of business debt and can also take over business assets in case of personal debt as well. There is simply no room to be financially careless.

An incorporated business however, grants the business a legal standing distinct from its owners. Ownership of incorporated businesses is through holding stocks (certificates of ownership). These stocks are the owners' involvement in the business, and through it they can get a share of the profit proportional to the amount of stocks they have. Because of the separation of owners and business in the eyes of the law, whatever arises as a liability in one camp leaves the other camp untouched. Creditors therefore cannot chase personal property in cases of bankruptcy in an incorporated business. Likewise, creditors cannot chase business assets in case the owners themselves get bankrupt. Separation of owners and business also allows the easy transfer of business ownership through stock distribution. Incorporation also allows the business to continue existing even if the owners retire or die, and allows more opportunities for government financing.

However, deciding not to incorporate a firm has some modest advantages in itself. There are fewer legal requirements to attend to; the start-up fees are lower; the recurring costs (costs which a business owner has to pay again and again) are lower and the entrepreneur's business losses can be deducted from money they earn outside the business. An unincorporated business, however, runs a string of disadvantages, like personal liability for business liability, higher tax rates (business income counts as personal income, so the tax rates followed are for personal income, and personal income tax rates are higher than those for business income), fewer chances for income sharing with other members of the family, and less flexibility in ending fiscal years due to the December 31st ending requirement.

Incorporation poses some drawbacks as well. Some of these include soaring start-up fees because of the legal costs that incorporation entails; more legal requirements to contend with; more record-keeping responsibilities in place, and the inability to deduct entrepreneur's business losses from money they earn outside the business. These, however, are minor compared to the benefits that incorporation gives. However, the large start-up fees can be quite a burden, so it is important to have some spare money first before considering incorporation, if finances are tough.

For more information about incorporating a business, talking to a business lawyer is recommended. Nevertheless, this is a guide for you to find out whether you will just be a plain sole proprietorship or partnership or you will ultimately incorporate your business.