Incorporation: Is it Right for your Business?
Deciding whether to incorporate a business or operate as a sole proprietor is a question often asked by business owners. Not all businesses need to incorporate, but it is a wise decision for many businesses. While many business owners address this issue during their startup phase, there are some mature business who decide to incorporate after operating as sole proprietors for years. Here are a few reasons why some business owners decide to incorporate.
If your business is not incorporated, you risk being personally liable for the debts and liabilities of your business. If a creditor gets a judgment against your business for any reason, the judgment is also against you personally and the creditor may seek to collect the judgment by placing a lien on your house or garnishing bank accounts (even jointly owned accounts or property).
Likewise, if your business is not incorporated, your personal creditors (including spouses in a divorce) may be able to access the bank accounts, real estate and other assets owned by your business. If you forget to pay your car insurance this month and injure someone in a vehicle accident, that person will be able to seek to recover what is owed to them through your business.
If your business may need to take out substantial loans, and you don’t want those loans to be reflected on your personal credit, your business will need to be incorporated. Otherwise, your ability to get funding personally or for your business may be hindered. Generally, financial experts say that it may take up to two years to start building business credit. Fortunately, I have found that there are a few lending agencies that are willing to work with business owners even before they reach their two-year anniversary.
Many investors are hesitant to invest in a business that is not incorporated because, ultimately, when the investors write their checks it’s made payable to “John Doe d/b/a Doe’s Construction” – which is ultimately John Doe, personally. They feel much better about making the check payable to an incorporated entity (e.g., Doe Construction LLC) because there are rules and regulations that govern what the business can and cannot do with business funds.
In addition to making the investors less hesitant to invest in your business, incorporated businesses are often perceived as more professional than sole proprietors.
One of the downfalls of incorporating your business is that you may be liable for additional taxes that sole proprietors are not liable for. Another downfall is that you may subject to additional regulations requiring more paperwork on your part. So, when deciding whether to incorporate, you should weigh the risks against the benefits to make the best decision for you and your business.