Incorporating your business is a very important step and a huge milestone for any small business owner or side hustler. Many are eager to Incorporate because it makes you feel official. Others see incorporation as the first step to really running your business “officially”. I will always stand by the fact that the difference between a business and a hobby is a customer. It’s the key to running a lean startup – don’t take on unnecessary expenses until you have revenue coming in. With customers bringing in revenue, incorporation should be top on your list of things to get done.
Here are my top five reasons why you should Inc ASAP.
1) Limited Liability
As a sole proprietor or someone who’s just selling services and taking money directly into your personal account you are open to what is called unlimited liability. This means that if a customer, or really just anyone, wants to sue you and your business for something that you’ve done, you could lose not just all of the business assets but all of your personal assets as well. These are the horror stories I’m sure you have heard of. Someone selling cupcakes and then losing their house when someone sued them for their allergic reaction to the goods. Not worth it if you’re looking at being in business for the long haul. While you can probably get business insurance under your personal name, that still doesn’t absolve you from being personally responsible.
By incorporating your business you get to form an entity like an LLC. You immediately protect your business and more importantly, your personal assets. Now the business entity becomes the person who can be sued or can sue others. And you don’t have to worry about losing your house, car or the shirt off your back. Not interested in incorporating for this reason?
Worst case scenario: you lose your shirt, you house, all of your savings, go bankrupt and have to start your financial life over. NBD
2) Tax Advantages
As an incorporated entity you can get additional tax benefits that individuals don’t get under the US tax code. This means that you can start writing things off. Like your health insurance, your life insurance, salary and wages that you’re paying employees of the business (including yourself). This is very different than how taxes flow when you remain a sole proprietor.
If you go the LLC route and get taxed like an LLC, your tax breaks will look the same. (Don’t take my word for it, call your CPA folks). Do you think it’d be great to get more write-offs for all of your business expenses? Start reaping some of the benefits of the big corporations you see out here in the world? (Ahem, like some $750 tax-paying former leaders of the executive branch?) Then you should look into incorporation as an S or C corp. The nitty-gritty of which entity and tax structure work for you are conversations to have with your business attorney / accountant.
Worst case scenario: you don’t incorporate and your taxes are an absolute nightmare for your accountant. Or worse, you don’t incorporate, keep doing your taxes yourself and then you get audited (gross + annoying)
3) Increased Credibility
One way to show that you’re really serious about your company is by incorporating your business. Folks who want to run a business but not take responsibility of business ownership send that message loud and clear to potential clients.
Forming a business entity demonstrates to large organizations and government entities that you’re not a here-today-gone-tomorrow type of practitioner, and that you understand the responsibilities of business ownership.
Oftentimes when responding to Requests for Proposal (RFPs) or bids for municipal contracts, they will require you to be incorporated and show proof of incorporation. Incorporating makes you available and qualified to actually take on bigger and more business. I don’t think there’s a huge worst case scenario with this one other than the opportunity cost of missed business contracts, which of course is to the detriment of how quickly you can grow and scale your business.
4) Establish your Business Credit Profile
This is huge if you’re looking at funding and getting capital for your business outside of your own savings account (something to think about). Venture Capitalists and Angel Investors will often look for a business entity so they can determine whether or not the business itself is going to be a credible borrower. The added benefit to you is that you no longer have to sign as yourself or use your own credit to fund the business. Instead, you’re using the business entity and its own credit profile to move funding opportunities of forward. (Think small business loans and grants).
Worst case scenario: you bill everything on your credit and, get sued, go bankrupt and now both you and your business have to start over, and you can’t get funded because your business credit was your personal credit and now no one will fund your business ever again. ( I know, these are really extreme).
5) Building Legacy through your Business
Unlike a sole proprietorship a corporation exists as its own entity with a lifespan that can extend beyond your years. If you think you would like to have something that is in perpetual existence then you definitely should incorporate your business. Incing gives you the ability to pass ownership down across generations as opposed to a sole proprietorship which dies with the owner.
Worst case scenario: Your business life ends with yours.
Those are my top five reasons why you should Inc ASAP. And if you’re finding that it still feels daunting and you’re not sure which type of entity to form or what type of tax benefits and financial obligations incorporating could lead to for you, then I highly recommend you speak to a business attorney and your CPA before jumping in. Come on people, you know you need your 5 Besties on speed dial for this stuff. Incorporation does come with additional filing obligations and bookkeeping obligations so this is a good place to lean into getting professional support as you build. So put on your big girl panties, and think in Inc. That’s how bosses do it.
