The Pros and Cons of Incorporating Your Business

Whether you’re already a small business owner or you’re thinking of taking the leap to becoming your own boss, determining the company’s organizational structure is an important consideration at any stage. Before deciding which structure may be best for your company, I recommend doing a bit of research.

It’s common for many new businesses to first begin as a sole proprietorship and then as the business grows, owners typically start to think about the value of a corporation. Incorporating a business means the formation of a new legal entity with numerous financial implications that may be either an advantage or disadvantage, depending on your business. Here are four items to consider before you incorporate.

  • Determining Tax Benefits
    My number one piece of advice when it comes to determining the best company structure for your business is to first discuss the options with your accountant. A sole proprietorship requires little paperwork, as business income is reported on the owner’s personal tax return, whereas a corporation requires a separate tax return along with separate financial statements. Your accountant will be able to answer specific questions related to tax benefits as well as information on possible income advantages.
  • Limited Liability
    Your lawyer can also provide you with information on the liability under the different company structures. A corporation is a separate legal entity, which can transfer legal liability to the business instead of the sole proprietor. Many consider this a significant advantage to incorporation. Again, your lawyer can provide the details on the benefits of limited liability. There are a number of fees and paperwork associated with incorporating your business and you’ll first want to meet with your lawyer to determine if these costs are worthwhile.
  • Debt Loads
    When a business is incorporated, personal and corporate debts become separated. This can be helpful when applying for loans whether it be for personal or business purposes. As a sole proprietor, all debts are in the owner’s name. This means, as an example, a business owner who is applying for a personal mortgage could appear to have a significant debt load because their business debts are in their personal name. Debts can impact whether they will be approved for the mortgage.
  • Access to Capital
    CUA offers a variety of options for businesses looking to increase capital, including commercial lines of credit, loans, mortgages and microloans. For incorporated businesses, they also have additional options available to them as the business grows, whether that be the issue of bonds or share certificates for investors.

There is no one size fits all when it comes to business structures. Just as each business has its own unique characteristics, each organization will have its own reasons for deciding whether or not to incorporate. If you have questions about how your organization’s structure can impact your banking options, please contact myself or a member of the CUA team at 902.492.6500. As always, we are always happy to help.

Revised Jul. 26, 2021

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