When To Incorporate Your Business: Part 1
September 17, 2018
As an entrepreneur, you may be wondering when to incorporate or even if incorporation is necessary. What is incorporation? Incorporation is the act of registering your business with the Secretary of State and creating an artificial entity. Incorporation is not for everyone. While it may seem prestigious to have an official corporation, it can also be a costly and unnecessary. Incorporation requires someone experienced with the process to setup and maintain your corporation for however long it is registered with the state. There are many important factors to consider before incorporating your business which will be outlined in detail over the next few blog posts.
The first important factor in determining whether or not to incorporate is your type of business operations. For small business owners in a service industry such as Accounting, Insurance or Real Estate, there are few benefits of having a corporation. The liability protection provided by the corporate veil would be less beneficial than an industry specific insurance or bond. Some states make business owners pay minimum corporate taxes regardless of whether or not the business profited. A sole-proprietor registered as a DBA with the county can operate under an assumed business name without being subject to state corporate tax minimums. Individuals filing as self-employed also are not subject to corporate tax minimums.
As a business owner operating in a non-service industry such as a food truck or property management including home services such as gardening and pool maintenance and handyman services, the most important question to ask is will the business have employees? If the answer is yes, you should definitely register your business with the Secretary of State. Businesses with employees are subject to employer taxes, workplace safety and health regulations and are also a tremendous source of liability. Mandatory insurance such as workers compensation will help protect employers from paying out of pocket for high medical bills as will state disability. Employers are much less protected if a former employee decides to sue because they feel they were wrongfully terminated. The corporate veil creates a layer of protection for the business owner or owners. An employee or customer isn’t suing you, they are suing your corporation. This protects the owners personal assets.
As a business in an industry that requires manufacturing or assembly you may have need of equipment or other specialized tools in order to complete your business operations. Having a business means being able to build business credit which means being able to open business lines of credit and take out leases and loans for the equipment or vehicles needed.
There are many factors to consider in determining whether or not to incorporate your business. The most important factor is the type of business operations but there are other considerations to make such as tax implications and accounting for business growth and branding. These other considerations will be covered in parts two and three of this blog.