Every business, no matter the size, needs to legally establish itself as a legitimate company.
There are many choices when it comes to incorporating your business. It’s always smart to settle on the most favorable option depending on the size and type of business you will be running.
For example, a flower shop will not be incorporated in the same way as a vehicle manufacturing company. Incorporating a business can pose a challenge because the process tends to be time-consuming, but this isn’t always the case. In this article, we will break down how to incorporate your business and choose an option that is suitable for your business interests.
Factors to Consider while Incorporating
- Control: For example, if you wish to run and operate the business alone then a sole proprietorship may be the best legal structure for the business,
- Limitation of liability: You are going to want to be protected from personal legal liability.
- Legal Structure, Cost, and Complexity of the formation: Every incorporating option has a different setup procedure, complexities involved, and the cost of formation.
- Flexibility and Future Needs: Entrepreneurs start businesses with a goal in mind. Therefore, the selected legal structure should be flexible and envision the future needs of the company.
- Tax implication: In order to make a profitable business, you should select options that offer to pay minimum taxes. The selected legal structures directly determine the amount of tax a business is required to pay.
- Continuity of existence: Depending on the selected legal business structure, entrepreneurs are able to dissolve the business when they wish or they can settle on an option that ensures the continuity of the business even if they aren’t active.
- Ongoing Administration: Complex business structures such as S corps have strict and rigorous record keeping and paperwork requirements compared to sole proprietors.
There are numerous options to choose from for entrepreneurs who want to incorporate their small businesses. Some of the most common options include:
Sole Proprietorship
A sole proprietorship can be one of the best models for a small business because it requires less paperwork and red-tape work.
Advantages
- The owner enjoys complete control.
- It is easy to establish and the tax filing process is simple.
- The owner further enjoys all the profits.
Disadvantages
- A sole proprietor is personally responsible for all the liabilities.
- Raising funds is limited to the owner.
- If the sole proprietor is incapacitated, the business will come to an end.
General Partnership
Advantages
- Enable the partners to share profits and losses.
- Partners enjoy equal rights in the management of the business.
- Easy to establish
- Such business is not obligated to pay income tax.
- Partnerships attract a wider range of skills, contacts, and knowledge.
- The business can experience improved management because it has more than one owner.
Disadvantages
- The partners are liable for their actions and those of other partners and their obligation.
- All the partners are liable for the debts and obligations of the business.
- Partners are required to seek unanimous consent before transferring interests within a business.
- Withdrawal of one partner can lead to the dissolution of the partnership.
Limited Partnership
Advantages
- The limited partner is only liable to the amount of capital contributed to the business.
- Attracts investors because limited partners have limited liability for the debts of the business.
- Profits and losses are taxed on the partners’ personal income tax returns
- Limited partners share the profits and losses without necessarily participating in the running of the business.
Disadvantages
- The General Partner is disadvantaged because he is fully liable for all the debts of the business.
- The state requires the partnership to file Certificate of Limited Partnership before the formation which includes state filing fees.
- When limited partners become active in the business they may change to general-partner thus a personal liability.
C Corporation
A C Corp is a separate legal and tax entity created by shareholders who offer money, property, or both for stock in the corporation.
Advantages
- A large pool of capital
- Shareholders are not personally liable for the debts of the corporation
Disadvantages
- It is mandatory to file Articles of Incorporation and pay filing fees.
- Double taxation because both the corporation and the shareholders are taxed.
- Shareholders with majority shares have a louder voice in the voting process compared to other parties.
S Corporation
This formation is great because it enables corporations to avoid income taxes.
Advantages
- Avoids double taxation because income is taxed only at the shareholder level.
- Shareholders are not personally liable for the debts of the corporation.
Disadvantages
- Filing of the Articles of Incorporation and paying the associated fees.
- Dominant voice is only attributed to shareholders that control a significant amount of or a majority of the corporation voting stock.
Limited Liability Companies
Advantages
- LLCs have a tax advantage compared to general partnerships.
- Liability of members is limited to the financial amount of their investments.
- No limit on the number of members
- Limited Liability Companies can have just one member.
- LLCs are flexible and members can conduct various types of businesses.
- Members have the authority to fully participate in the management of the company
Disadvantages
- There are very few disadvantages of an LLC.
Conclusion
In conclusion, how you incorporate your business completely depends on what you are trying to accomplish with your business.
If you are riding solo in your business endeavors, a sole proprietorship may be the best thing for you. Although, if you want to protect your personal assets from any complication within your business, an LLC is probably your best bet.
That is why we recommend starting with an LLC if you are an entrepreneur starting a small business. An LLC will protect your personal assets and make your business legitimate.
