Every business needs to have a legal structure before the doors can open for business. There are many legal structures that business owners can choose from. Among them, sole proprietorship is a popular and common choice among small business owners.
This is as it’s relatively simple and inexpensive to become a sole proprietor. An incorporated business however, has initial funding concerns before business operations can effectively begin. These can come in the form of the need for startup capital, operating costs, tax responsibilities and more.
Since becoming a sole proprietor is easier, many business owners choose to go down the route. Eventually, there comes a time when a sole proprietor may think about changing their legal structure. This usually coincides with a substantial growth in profit.
Sole Proprietorship vs Incorporating: Why Do Businesses Choose to Change Their Legal Structure
As a sole proprietor, there are certain rules and regulations that govern how you operate your business. For example, you and your business are considered the same legal entity under this structure. For many business owners, staying as a sole proprietor for their entire lives bodes no problems.
However, as a sole proprietor, you have certain responsibilities and are subject to certain liabilities. You are financially and legally responsible for your business. As a business owner, this extends to the performance of your employees as well. Essentially, if someone were to sue your business for any reason, then as the sole proprietor, you can face legal proceedings.
Since in a sole proprietorship, you and your business share the same legal identity, you also share the same assets. So if a person were to sue your business, say for a bad plumbing job that caused water damage, you can lose your assets. If you can’t pay of the settlement amount, then your finances and personal assets can be used to pay off the settlement.
In an incorporation on the other hand, your personal assets and finances remain secure at all times. There is a distinction between your identity as a business owner, and the identity of the business. If you incorporate your business, you share only a limited liability over the business. So if an incorporated business gets sued, then the money and the assets of the business owner aren’t affected.
Business owners who are considering incorporating their company should think carefully about the next legal structure to choose. To be incorporation, you can choose between different legal structures, such as a limited liability company, or a C-corp.
Should Small Business Owners Incorporate?
Simply incorporating a business isn’t enough to make it more conducive for growth. If you choose to change to a limited liability company, for example, then you will continue to enjoy much of what you already enjoyed as a sole proprietor. The key difference here lies in the fact that your personal identity and your business’s identity are separated in an LLC.
Other legal structures, such as a C-corporation, provide greater benefits, especially when it comes to taxes. Tax burdens are a major reason behind why some business owners choose to incorporate their small business.
In small proprietorships, income tax is charged on the net income of the business owner. In LLCs, this doesn’t change. But in a C-corporation, the tax benefits are much greater. Since the business income is separate, you don’t have to show it in your personal income. If you want to save on tax and don’t require your business funds in your personal account, you can leave that amount with the business. This means that you pay less tax and save money at the same time. Perks and benefits like these greatly draw people towards incorporating their small businesses.
Business Growth And Authority
Growing businesses, especially those who are doing well financially, should consider incorporating their businesses. This protects personal assets and finances. Another aspect of business growth comes in the form of reputation. In general, people tend to take an incorporated company more seriously than a sole proprietorship.
This can reflect in am increased desire to work with incorporated companies over sole proprietor businesses. It’s also easier to secure funding, both from the government, as well as personal sources, when incorporated.
Sole proprietors don’t always have to incorporate their companies. However if the find that their business is doing well and that they are making a lot of profit, then consider incorporating the business
This reduces the risk of losing personal finances, assets and belongings. You also find protection when it comes to declaring business bankruptcy, as only business assets will be seized.
An incorporated company can also enjoy several tax benefits, which enable them to make more profit at the end of the day. Whether a business owner should stay a sole proprietor or incorporate depends on the personal business requirements of the owner. Where incorporating confers more advantages, business owners should incorporate. This is typically witnessed in he form of profits, business growth, growth in reputation etc.
Business owners can also consider business insurance as a way to add an extra layer of protection for their business. Protect your business, your personal liability and your finances with business insurance. If you want to learn more about business insurance, then click here.