To Incorporate or Not to Incorporate?

In my practice, there is no question I get from small business owners more often than “Should I incorporate?” As with most business decisions, there are many factors that must be weighed when making the decision whether to incorporate a business. No amount of “rule of thumb” can replace evaluating each case on its own specific circumstances.
Here are some of the relevant factors to consider when deciding whether to incorporate:
1. What is the expected profitability of the business? For example, is the (realistic) expectation to make $20 thousand or $1 million per year? Corporations pay taxes on a different rate schedule than individuals, so planning for profitability and the taxes that come with it can be an important factor.

2. Will the business want or need to raise capital by taking on equity investors? The corporate structure makes it easier to take on investors – the business simply sells stock to them. If the only planned financing source is debt, then a corporation might not be as attractive to the owner.

3. What is the expected risk exposure of the business? Corporations provide an excellent way for shareholders to shield their personal assets from the activity of the business. If the business carries a high risk of liability, a corporation might be attractive to the owner. If the business is “safe”, the owner might be able to find all the coverage they need with liability insurance.

4. Does the owner need to be able to pay benefits to the employees (or themselves)? Corporations are generally regarded as the best form of doing business where employee benefits are concerned. From health insurance to defined benefit plans, corporations have the clear edge.

5. Does the owner expect the business to go on after they are gone? The corporate form of business can exist long after the founder has retired. Since it operates as a separate legal entity, the corporation does not “live or die” with its shareholders. It simply hires a new CEO and continues on.

6. How much paperwork can the owner tolerate? For all of its advantages, the corporation can provide a large paperwork requirement burden to the owners. The corporation must file a separate tax return, meet state requirements regarding shareholder meetings, keep minutes, track stock, have a separate bank account, and essentially be treated in all manners as separate from its owners. For the extremely small business, this can be a cumbersome burden.

Making the right decision on whether to incorporation can be critical to the success of the business. For more information on how to make the right decision, contact our business consultants for an evaluation of your business needs.