Incorporating is setting clear legal definition a sensible move for most business owners. Typically, many business owners start their entrepreneurship journey off as a sole proprietorship before considering other business structures. Simply because it is so easy to get started.
If you are a sole proprietor or person looking to get your company off the ground by incorporating your business, then this article is for you. There are many benefits of incorporating your business. We'll show you the top 7 benefits you'll receive from incorporation you'd be able to take advantage of.
Note: If you are a sole proprietor or business owner who needs help managing all of your invoices, taxes, proposals, and contracts in one place, try Bonsai. Our software with editable templates and an expense tracker allows you to easily take care of them. Claim your 7-day free trial today.
The Top 7 Benefits Of Incorporating Your Business
A sole proprietorship or unincorporated business carries a lot of risks and disadvantages. An incorporated business protects your personal assets, gets tax advantages and bolsters your credibility. In the next section, we'll explain more in detail why you should incorporate your business. Check out or best states to incorporate resource.
The biggest disadvantage of sole proprietorships is unlimited liability. All this means is that if you are involved in any legal litigation, your personal assets could be sought after.
This is because your business and yourself are treated as one and the same. Any personal liability can be
On the other hand, if you have an incorporated business, your business would be treated as a separate legal entity. This means you'll have limited liability and protection for your personal assets.
Having liability protection is one of the biggest benefits of incorporating your business. It'll give you peace of mind as you conduct business without risking your homes, cars, personal property, or savings.
Shareholders are also not responsible for debts the business incurs. So if your business declares bankruptcy, shareholders would only lose out on however much they invested into the business. The business owner's personal assets will be protected.
Tax Advantages And Benefits
Tax time isn't the most pleasant time for entrepreneurs. However, incorporated businesses do have some benefits that can make paying taxes a little less painful. Let's review some of the tax benefits available to you if you incorporate your business.
By incorporating as a C corporation or S Corporation, you'd be able to carry losses forward. Carrying losses forward was introduced by the IRS to allow taxes to be fairer. I'll explain how to take advantage of this in the next section.
Carry Losses Forward
This neat little track allows you to lower the taxes for each year so the losses are spread.
For instance, let's say in 2021 you made a profit of $75,000. You'd have a taxable profit of $75,000. However, in 2022, your company lost $75,000, which means you made no profit. The IRS recognized this issue is because their 1-year tax cycle doesn't line up with business cycles. By carrying losses forward, they'd allow you to adjust your tax liability to make your taxes fairer.
In most states, you could carry losses forward for up to the next seven years. Use this little tax hack to lower your tax liability.
Avoid Hefty Personal Income Tax Rates
Having a separate legal entity also has its tax advantages. For example, your income won't be subject to self-employment tax because you would be able to pay yourself in nontaxable dividends. Since corporations are taxed separately from their owners, they'll pay lower tax rates.
Plus, corporate tax rates are generally lower than personal income tax rates.
Write-Off Incorporation Costs
Incorporating provincially and federally can be quite a hefty expense. Luckily, a small business owner who incorporates can write off the start-up costs from their tax bill. Depending on what state you live in, you'd be paying around $500 to $1,100 in incorporating costs. A state like California would cost around $1,100 for incorporation.
For any advice on writing off these expenses, you should contact a tax professional.
Note: if you need help managing all of your tax deductions and recording all your receipts or taxes, try Bonsai Tax. Our app will scan your bank/credit card statements to discover all the potential deductions you qualify for. In fact, users save on average $5,600. Try a 14 day free trial today.
Easier To Raise Capital
Easier access to capital is a huge advantage of an incorporated business. First, if you are looking for a bank loan, many banks would much rather lend or credit money to corporations versus an unincorporated one. If a corporation has business debts, they have many alternative ways for corporations to raise funds and pay off the loans or debt. It is a requirement to perform company incorporation with a bank account separate from personal finances.
Issuing stock to a large number of investors is a very simple way for a company to raise funds. Thousands of stockholders are not unusual in corporations.
As a corporation, it'll be simple for stockholders to transfer ownership. This along with the limited liability make it more charming to outside investors.
Easier access to funds in case your business ever needs it is a key advantage of incorporating vs sole proprietors.
Build A Better Reputation (Credibility)
If you would like more credibility as a business owner, incorporating your business is a great way to do so. Companies that incorporate are seen as more professional than a sole proprietorship by suppliers, customers and business associates.
A Federal incorporation identifier added to the business name adds a ton of credibility for businesses.
Protects Your Brand
When you incorporate your business, you'll protect the name of your business, logos, slogans, and the colors that make up your brand. These trademarks help protect your brand and distinguish your business from everyone else.
A corporation is a business structure that continues to exist indefinitely (regardless of what happens to the directors, managers, shareholders, or officers). This is beneficial for investors because it is a safer bet to invest money into a company. Investing in a company, more stable place for investors to put their money and raises the chances that the investors will see a return on their money.
A small business as a sole proprietorship is very risky to invest in. If the owner dies, they business would cease to exist.
Easier To Transfer Businesses
A corporation is a separate legal entity from a business owner. Owners do not own its assets directly. Instead, they become shareholders in the corporation. Owning shares means they own the assets. There are many advantages to
This makes transferring ownership interests much easier. This ability to transfer ownership makes it easier to attract investments or raise capital.