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Should your small business become a corporation? This is a question you need to ask during the start-up and evolution of your company. Learn what you need to know about incorporating your small business.
Bill's years of hard work had finally paid off. Bill's company, a sole proprietorship computer business was earning solid profits and had built a large client base. Bill thought he had it made until a part-time employee had "an accident" that wiped out a customer's computer system.
In a matter of months, Bill's dream business came tumbling down. Slapped with a lawsuit, the sole proprietor lost all his assets, savings, house, and marriage. If Bill had his company incorporated, his business and personal life would have been separated and had an additional layer of protection.
Incorporation reduces disasters. According to BizStats.com, only 22% of all the small businesses in America are a limited liability corporation, S corporation, or C corporation. Over 72% of businesses are solely operated and exposed to liability risk.
The decision to start your own corporation will vary, depending on the needs of the business and yourself. Consider the following benefits of incorporation:
The Benefits of Starting Your Own Corporation
- Liability: A corporation exists as a separate legal entity from your personal life. Any debts or lawsuits are incurred by the company, not the owner. Any business with potential for lawsuits should consult with a lawyer and consider incorporation. Incorporating will offer an added layer of protection but it is still advisable to obtain business liability insurance.
- Debt: The bad debts will often be the responsibility of the corporation. In the case of bank financing, more and more banks require business owners to sign a personal guarantee; making your personal assets collectible on a defaulted loan. Consider your options before signing.
- Taxation: Another main benefit to incorporating is the taxation of a company. Corporations are often taxed at a lower rate and have better taxable benefits. Talk to your accountant about the tax advantages.
- Raising Money: Financing a small business as a sole proprietorship or partnership can be difficult. A corporation can sell shares of the company and raise money easier than other business structure types.
- Selling the Business: A non-corporate business is hard to valuate properly. A business corporation value will be based on the business, not the owner, therefore making it easy to sell the company.
7 Steps to Start Your Own Corporation
Starting your own corporation can be more costly and time-consuming than other business types. Your accountant and lawyer can advise you accordingly. The steps to incorporation are as follows:
- Choose a Corporate Name and Address: Have a corporate name search performed to ensure you are unique and have no trademark problems in the future.
- Select a State to Incorporate In: Setting up a corporation will be easier and cheaper in your home state than out of state.
- Select a Corporation Type: Determine the best type of corporation for your business--LLC, S corporation or C corporation.
- Determine Company Directors: Directors of the company and positions will have to be filed within the Articles of Incorporation and by-laws.
- Choose Your Share Type: Corporations can issue common and preferred stock. Select the best for your situation.
- Obtain Certificate of Incorporation: Available from local state office or business retailer
- Process and File Incorporation: Your incorporation can be completed by a lawyer or a do-it-yourself kit. Finally, file your incorporation with a Registered Agent.
The decision to incorporate or not is an important one. Work with your advisors to determine if the time is right for you. Don't wait until it's too late as Bill learned.