Why is it Important to Incorporate?

Why is it Important to Incorporate?

Whether you’re just starting out or you’re already in business, it’s important for you to understand the benefits of incorporation for your business. Incorporation has a lot of advantages such as tax deductions, credibility and liability protection. It’s also a whole lot easier to raise capital for an incorporated business as opposed to other business structures such as sole proprietorship or partnerships. And who couldn’t use more capital? 😉

In the long term, incorporating is the best option for most businesses. While you can still do well with other unincorporated business structures, they are quite risky as they don’t offer any protection against liability.  So if someone sues your business, they can also come after your personal assets.  Ouch!

Here’s 5 reasons that make an incorporated business a smart move:

1. An Incorporated Business Offers Liability Protection

People usually start their business out as either a sole proprietorship or a partnership. While these can be great structures for startups, they offer absolutely no protection for your personal assets. Business is always a gamble, what if things don’t go as planned? Do you want to risk everything you own?

I know, I know. You don’t want to think so bleakly, but trust me … it’s better to be safe than sorry. I’m not telling you to abandon your dream. I’m just directing you to a safer road to get there.

Incorporating your business will give your startup a status of a separate legal entity; you won’t be held personally liable for your business. You can give it all you’ve got, and still have your personal assets intact as your backup.

2. Incorporating a Business Gives it More Credibility 

Business is all about trust. People feel more comfortable doing business with a company that they perceive to be a legitimate entity approved by the government. A good way to send this signal to people is by adding the abbreviation of your legal structure to your business name.

When you incorporate your business, you will have to choose a business structure:

  • LLC (Limited Liability Company)
  • Coporation (C or S)

Depending on the structure you select, the abbreviation will be added after your business name, such as Inc, Co or LLC.

This will inspire a reputable image of your company for your partners, customers and suppliers alike.

3. Incorporating Comes with Added Tax Advantages

Incorporating your business can also save you tons of money in taxes. Many expenses such as travel, entertainment, insurance, production cost, advertising cost, employee benefits and others are tax deductible. That’s not all … owners of incorporated business are also exempted from paying many self-employment taxes that are paid by the owners of unincorporated businesses.  Pretty nice, right?

4. Incorporating Your Business Ensures Continuity

One of the best advantages of an incorporated business is that it does not depend upon its founders for existence. Unlike partnerships or sole proprietorships that cease to exist if their owners pass on, the continuity of an incorporated business will not be disrupted even if  the owners die or a key shareholder withdraws his/her shares. As an incorporated business is a separate legal entity, it has a life separate from the life of its owners.

5. Incorporating Your Business Establishes Central Command and Control

Incorporating a business requires that your business has a well-defined hierarchy in which control passes from shareholders to the board of directors. All important decisions are voted upon and approved by the board of directors. This ensures that power is not abused in the company, and decisions are based on the future of the company as opposed to personal gains.

You can hopefully see now that incorporating can bring a lot of discipline and credibility into your company. Most people are a bit reluctant to incorporate because of  the complex legal process. While that is a legit concern, it has an easy solution. Let someone else do the registration on your behalf. There was a time when this used to be expensive, but today there are plenty of incorporation websites that offer their services at affordable rates. Here’s a good comparison of some online incorporation websites to help you sort out the right company suited to your startup. Good luck!

Memuna Umber

Memuna is an MBA student who loves learning about business, entrepreneurship, and society. She brings a lot of business and finance experience to the StarterPad team.