It takes time to build a successful business. In the beginning, you may begin as a sole trader, but as the business grows, there will come a point when you think about incorporating or forming an LLC. You don’t have to do this, but there are many good reasons to take this step, and if not now, then at some point in the future.
In this article, we are going to outline the main reasons why incorporating could be a smart move. This article is no substitute for professional advice, but it should give you an idea of some of the advantages to incorporating.
Limit Personal Liability
One of the biggest advantages of incorporating a business is that the act of incorporating removes the risk of personal liability. Creditors cannot chase you for company debts. If the business defaults on a loan or you are facing a lawsuit from a disgruntled client, your home or assets are not at risk. In a family-run business, this is very important.
However, it is important to understand that there are some instances where the corporate veil can be lifted. For example, if you commit a crime or mistakenly sign a business contract in your own name. In these instances, being an LLC will not protect you from liability.
Many business owners cite finances as a strong reason to incorporate. Businesses and individuals pay different amounts of tax. Most wealthy people operate through a company structure because they pay less tax. It is not all plain sailing, however.
Paying lower taxes is great, but don’t forget that there are corporate obligations to fulfill. Nevertheless, if you want to save money, incorporating could be a smart move, so speak to a tax advisor to see if it will benefit you.
Establish Business Credibility
Many clients would rather deal with a business than a sole trader. Incorporating helps to establish a greater degree of business credibility, and in some sectors, you may have no choice about incorporating if you want to tender for certain contracts. Incorporating is also an advantage if you need to apply for credit since many lenders would rather loan money to an established business rather than a sole trader.
An Extra Layer of Privacy
Once you incorporate, you can use a registered agent service, so your personal details are not on record. It’s an extra layer of privacy, which for some people, is very important.
Separate the Business from the Personal
It is a lot easier to manage your finances where business and personal expenditure is separate. Blurred lines between business and personal finances are common when operating as a sole trader, especially as the business grows. When you operate as a sole trader all profit belongs to you and can be withdrawn at any time, whereas in a company, profits belong to the business. It is a lot easier to manage income from a company; you can pay yourself a salary and then withdraw profits via dividends.
Incorporating is not right for everyone, so take professional advice before you take this step.