Ask Diane: Should I Incorporate My Business?

Real Entrepreneurs. Real Questions. Real Answers.

Question:

Should I incorporate my business or not?

Answer:

As you launch your new business venture, an important consideration is that of legal structure. You alone must decide how you want to legally organize your business. However, wise counsel from a trusted professional (CPA or Attorney) would be beneficial and allows you to review the pros and cons of the various legal structures.

An overview of the basic four primary formations for a small business:

• Sole Proprietorship
• Partnership
• Limited Liability Company (LLC)
• Corporation

There are distinct advantages and disadvantages to each formation. Again, the insight of a professional is recommended. This overview isn’t intended to replace the wisdom that comes from legal counsel.

Small Business Advantages (http://www.smallbusinessadvantages.com) does a phenomenal job of comparing the different business structures. I recommend you heavily consider each of the advantages AND the disadvantages. Here’s their summary version:

Sole Proprietorship—A sole proprietorship is probably the simplest and least expensive option. Most small, one-owner businesses select this option due to ease and limited budget. There is no real formal structure, you retain complete control of your business and the taxes pass through to your personal tax return. You must also register your business with appropriate offices.

Partnership—A partnership is similar to a sole proprietorship, with the obvious distinction of more than one owner. It is inexpensive and easy to establish. The profits pass through to the owners’ personal tax return. However, you will want to establish a partnership agreement which sets forth the specifics of the partnership to avoid potential miscommunication.

Corporation—A common form of business structure, a corporation is its own legal entity separate from its owners. It can be small or large. A corporation has tax deductions that aren’t necessarily available in the other structures, but as a corporation the income is actually subject to income tax. A corporation offers the owners a much greater protection from personal liability.

Limited Liability Company (LLC)—A limited liability company offers flexibility. Similar to a corporation, owners maintain a greater amount of protection from liability for debts and claims against the business. Yet, similar to a partnership, the management is simpler and you have the option of pass-thru taxation (the company doesn’t pay a tax on its income).

Readers, what do you think? What choices did you make as you organized the legal structure of your businesses? Why?

Need help surviving in the business world? Submit your entrepreneurial questions to Diane at [email protected]. Please note that all questions selected for public display may be edited for clarity and privacy and become the property of NACWE.