Why Consider Incorporating Your Small Business

At some point, small business owners and sole proprietors alike run into the question of whether or not incorporating their business is the right way to go.

While incorporating a business may mean the formation of a legal entity separate from its owners, the costs and strenuous paperwork can be incredibly daunting. Between the upwards initial legal costs of $1,000 to $3,000, the corporate tax return which would typically run you at least $1,500 each year, not to mention the accounting, which—depending on whether or not you plan on doing your own bookkeeping—can really add up, incorporating will inevitably be more burdensome when it comes to filing your taxes and keeping your legal records up to date.

But here’s why you should look past all of that and consider incorporating your business.

Essentially recognized as its own person under the law, an incorporated business has the added benefit of the “Inc” or “LLC” designation that comes with it, which can greatly influence the public’s view of your business. This alone can instill confidence and the perception of legitimacy and professionalism for many potential customers, investors, and partners.

Furthermore, whereas sole proprietors have an inability to raise equity capital, corporations can raise money far more easily than individuals, thus making reinvestment in expansion and growth a lot simpler. This ability to gain funding through the selling of shares gives corporations the ability to pay shareholders dividends from the company’s earnings. This means that if you made your spouse and children shareholders in the corporation, technically you can redistribute income from family members in higher tax brackets to family members with lower incomes, and get taxed at a lower rate.

Furthermore, any income or debt incurred to the corporation belongs to the corporation, not the owners. Therefore, unlike sole proprietors or partnerships, shareholders are in an advantageous position of not being personally responsible in the event that a corporation defaults on a loan or files for bankruptcy.

Sure, when it comes to filing separate tax returns, an annual return, one-time articles of incorporation, and notifications of share sales, moves or changes of directors, corporations face a lot of costs in time, money, and paper. But perhaps from a tax perspective, this is a small price to pay in the grand scheme of things.

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