4 Reasons to Incorporate Your Business

4 Reasons to Incorporate (or Form an LLC)

When you start a business, it's tempting to get caught up in listening to attorneys and advisors tell you "You MUST incorporate." Incorporating a business may be a good move for your new business, or it may be something you can wait and do later. Understanding the reasons for incorporating a business can help you make a decision.

1. To get financing. Some lenders prefer that you have a specific legal business structure, rather than just a sole proprietorship. Particularly for liability purposes (see reason #2), the bank wants to know that your business is protected so you can pay back your loan.

2. To limit potential liability. Liability is variable, depending on the type of products or services you provide and the number and type of employees. If you are working at home writing software or a blog, your liability is probably limited. On the other hand, if you have products that could harm people or if you have employees, you might want more protection than just liability insurance. Your liability may change as your business grows and as you add employees.

3. For tax reasons. This one is tricky. Corporations are separate tax entities, and the taxes on a corporation may or may not be greater than taxes for a company that is taxed at the owner's personal rate. Spend some time with your tax advisor to make sure you understand the tax implications of incorporation.

4. To manage income as your business grows. When you start out, you may not be making money right away, and you may decide it's not worth it to incorporate. But as you go along, you may find that you want to separate your business income from personal income and take a salary. Having a corporation allows you to do this; it's one case where a corporation is preferable to an LLC (an LLC is taxed at the personal tax rates of the owners). Timing is important, so if you think you might be making a lot of money in a particular year, you may want to switch to a corporation or S corporation.

The bottom line: Don't incorporate just because your attorney says it's a good idea. Attorneys make money helping you incorporate, and they make no money if you stay a sole proprietor or create a do-it-yourself LLC.

Selecting your business structure is a decision is not a once-and-done situation. Revisit the question often, as your business grows and changes. Review all the alternatives and consider what's best for your business at this time and into the future. Remember, it's always possible, and easy, to change from a sole proprietorship to an LLC or a corporation. It is almost impossible to un-incorporate your business and go back to being a sole proprietor.