Should I Incorporate?

by Shaya Silber

Entrepreneurs who are at the early stages of building their business are faced with numerous questions. One of the biggest questions for new ventures is what business form they will operate under. The two most common forms of business structures for small businesses are corporations and sole proprietorships. (Partnerships are also an option, but are less common). Incorporation offers numerous advantages, but also include a number of added responsibilities for the business.

Corporations

Incorporating offers a number of advantages to operating a business. The most important of which is limitation of liability to the corporation. A corporation is considered an independent legal entity from their shareholders/owners.  This means that the assets that are owned by the corporation are separate from the personal assets of the corporation’s owner(s). This can be beneficial if the business runs into liability down the road. If the business is found to be liable, the liability is limited to the assets of the corporation (there are some situations where a court will “pierce the corporate veil”, and go behind the corporation to hold its personally owners liable – most commonly in situations involving fraud).

Corporations also have additional responsibilities. For example, a separate tax return must be prepared for the corporation. Additionally, financial statements should be prepared and annual meetings should be held.

Corporations are also taxed differently than sole proprietorships. In some instances this can serve as an advantage, and in other cases it can be a disadvantage. Before incorporating, you should have a discussion with an accountant regarding tax implications.

Sole Proprietorship

A simpler form of operating a business is via a sole proprietorship.  The advantage of a sole proprietorship is that the owner directly owns the entire business. The owner may also deduct some expenses from her income.  Another major advantage to operating a sole proprietorship is that it is much easier and cheaper to set-up than a corporation.

The biggest disadvantage to operating a sole proprietorship, is that the personal assets of the owner (such as a house, car, investments etc), are no different from the assets of the business. If the business is found to be liable for any reason, a creditor can seize the owner’s personal assets to satisfy the debt.