The Pros and Cons of Incorporating Your Small Business

Starting a small business can be an exciting endeavor, but it also comes with many important decisions to make. One crucial issue business owners will need to address involves whether or not to incorporate a business. Incorporation involves forming a legal entity separate from the owners of the business. This entity has its own rights and liabilities, protecting you as the owner from personal liability in case something goes wrong. As you address issues related to business formation and entity selection, you can work with a business law attorney to make sure you understand your options and follow the correct procedures.

The Benefits of Incorporating Your Small Business

• Personal Liability Protection: One of the biggest advantages of incorporating your small business is that it protects your personal assets from being at risk in case the business faces any financial or legal troubles. If your company gets sued or accumulates debt, only the assets owned by the corporation are subject to seizure — not your personal belongings.
• Tax Benefits: By incorporating your small business, you may be able to realize significant tax savings. When you incorporate, you can take advantage of certain deductions and other tax benefits that may not be available to sole proprietors or partnerships.
• Raising Capital: Incorporated businesses often find it easier to raise capital through investment opportunities such as selling shares or attracting investors who prefer dealing with established corporations rather than individual entrepreneurs.
• Credibility and Branding Opportunities: An incorporated business typically appears more credible and professional than an unincorporated one. Being able to add terms like “Inc.” or “Corp.” after your company name adds prestige and legitimacy to your brand image, potentially attracting more customers and clients.

Potential Drawbacks of Incorporating Your Small Business

• Complex Legal Procedures: The process of incorporating a business can be time-consuming, and you may need to address a variety of complicated legal concerns. However, with the assistance of an attorney, you can ensure all necessary paperwork is properly filed with the appropriate government agencies.
• Costs Associated with Incorporation: Depending on your location and the nature of your business, incorporating your company may involve significant expenses, such as registration fees, state taxes, annual reports, legal fees, and ongoing compliance costs. These expenses may exceed the amounts that would be required for a sole proprietorship or partnership.
• Increase in Compliance Obligations: Once your business is incorporated, there are certain legal requirements that you must meet regularly. These obligations include filing specific tax forms and financial statements at periodic intervals based on governmental requirements. Failure to fulfill these responsibilities could result in fines or other penalties against your company.
• Limited Flexibility in Decision-Making: As an incorporated entity, decisions regarding major issues related to your business (such as changes in ownership structure or distribution of profits) need approval from shareholders. This could potentially affect your decision-making autonomy and limit your control over the direction of your business.
• Potential Double Taxation Issues: Certain types of corporations—specifically C corporations—may be subject to double taxation because profits are taxed both at the corporate level and again when distributed as dividends to shareholders. However, structuring your business as an S corporation may avoid this issue while also allowing for pass-through tax deductions. It is important to consult with an attorney before deciding which type of corporation is best suited for your business.

Contact Our DuPage County Business Formation Attorney

If you are considering incorporating your small business, it is important to consult with a professional who can guide you through the process and help you understand the legal and financial implications of the decisions you make. At the Gierach Law Firm, our Naperville business incorporation lawyer can make sure you take the best steps to protect your business and ensure that you can maintain ongoing success. Contact us at 630-228-9413 to set up a consultation and learn how we can help you develop a successful business strategy.

Sources:

https://www.uschamber.com/co/start/startup/how-to-incorporate-business

https://www.nerdwallet.com/article/small-business/how-to-incorporate-a-business