Incorporating a Small Business

Every small business owner considers incorporating his or her business at some point. When you incorporate a business, the form of a business isn’t permanent; later on down the road as it grows you can change the legal structure of your business. A common scenario is when a small business starts out as a sole proprietorship or a partnership, then becomes an incorporated business at some later date when the business has grown.

So, if you’re a freelancer, a “mom and pop” home business, a small store, or a consultant, or any other manner of self-employed person looking to expand into that heady status afforded by the title of “CEO”, here’s the least you should know.

The main advantage of becoming an incorporated business is that you have limited liability as an incorporated company. When a business becomes incorporated, the liability of any individual shareholder is limited to the amount which he or she has invested in the company. A sole proprietor might have their personal assets open to being seized to pay the debts of their business. But as a shareholder in an incorporated business, you usually can’t be held responsible for the debts of the corporation.

And yet, a corporation enjoys the same rights as an individual. A corporation can own property, carry on business, and sue on behalf of their business name. Also, a corporation has an unlimited life span. This means that the corporation will continue to exist regardless of the comings and goings of the individual shareholders.

A corporations also has more ways to raise money, making it easier for the business to develop and grow. While a corporation can incur debt like any individual, it can also raise equity capital through such means as selling shares. This is a big advantage, because equity capital incurs no interest and does not have to be repaid. You can also control when and how you receive income, planning ahead to ensure maximum tax sheltering. you shouls also see starting a small business.

Becoming a corporation has disadvantages as well. For instance, a corporation requires statutory authorization. This means that the business has to be approved by the the state in which they are based. Depending on which state you reside and do business in, the laws may be beneficial or detrimental.

There is also a doubled tax burden. The business pays taxes on its net profits and the individual shareholders pay income taxes. However, the tax rates for either are lower than a sole proprietor’s. There are fees charged by various controlling entities. And before doing business in another state, the corporation must obtain a certificate of authority for that state.

These drawbacks are largely a matter of subjectivity. A business which is growing fast enough to even consider incorporating is probably going to benefit. Also, the tax factors are offset by some nice perks. Besides having the advantage of tax deferral potential, your corporation will also usually qualify for a small business deduction. This is an annual tax credit at the rate of about 16% of taxable income, which may be a much lower rate than what you’d pay as a sole proprietor.

The role of corporations in the modern global economy is growing at an ever-increasing rate. If you find your business growing faster than you can contain it, chances are that joining the corporate elite could be the smartest move you ever made!If you would like to pursue further information on incorporating a small business or funding it, go to incorporating a small business grant.