Most businesses start as either a sole proprietorship or a partnership. But there comes a time when it becomes necessary to become a corporation. So when do you need to incorporate?
When the profits are large enough to merit protection
Forming a business entity is important to separate personal and business accounts and liability. But startup owners don’t find it necessary to jump into the incorporation bandwagon immediately. However, when the profits and coverage of the business become large enough, perhaps the owner should start looking at registering the business as a limited liability company (LLC).
When the business becomes an LLC, the responsibility and liability of a business owner will be limited to his investment in the business. A sole proprietor will have to face loans and legal liabilities on his own and with his own personal money and properties.
When you decide that credibility is important
A corporation gives a semblance of credibility to the business. According to Fox News, adding Inc. or LLC to the name of the company immediately add authority and legitimacy. Customers would look at a business differently if it is incorporated. And the advantages don’t end with customers as suppliers prefer giving better deals to incorporated companies.
When you need to raise money
Because you already have that badge of credibility, it is much easier for the business to get money. Even sole proprietors and partnerships can borrow money from banks and lending institutions, but corporations have other means of raising money: equity financing. This is the process of raising capital or business money through the sale of business shares. The advantage here is that because you are selling shares, you don’t need to pay back with interest and you don’t incur a penalty for late payment.
When you want to sell the business
Corporations are like diamonds—they are forever. While the incorporators die or leave the business, the corporation continues to exist. The advantage here is that if you want to sell the business, it is so much easier to sell it as a corporation rather than a sole proprietorship.
When you want to take advantage of possible tax benefits
An LLC is taxed like a sole proprietorship but better because an owner’s personal liability is protected. But it is actually much more flexible than that because an entrepreneur can also elect to be taxed as a corporation. Either way, there are advantages—so it is up to the owner which advantage weighs heavier.
If the business is incorporated, you also have a choice on when to receive an income from the business. This way, you can choose to get an income when tax is at its lowest. There is also an option of taking dividends rather than a salary, which has a lower tax rate.
When you have dreams of going public
Yes, this seems like a lofty dream. But dreams are free, so why not take it to the maximum? Corporations are the best vehicle to go public. So what are you waiting for? Incorporate now!