There are no specific size requirements to incorporate business since companies of all sizes are susceptible to lawsuits. There are a number of reasons why incorporating it might be a good idea.
What is Incorporation?
Incorporation is the process of establishing your company so that it becomes legally separate from the owner. The 3 most popular business structures used for small companies are:
- Limited Liability Company: An LLC transforms your business into a legal entity that is separate, which means as the owner you are not personally held liable if the business becomes indebted or receives lawsuits.
- Corporation: This consists of a business entity that is created through issuing Articles of Incorporation. Once your business is incorporated, your personal assets are shielded from corporate liability.
- Sole proprietorship: This is the default status of merchants who sell services or goods. You can be personally held liable if you incur either liability or business debts and lose your assets. Be very careful with this option as there is virtually no protection and you could be personally liable for anything your business does.
Additionally, both corporations and LLCs may be registered for taxation as S corporations for preventing so-called “double taxation”. Anyone who actually pays double taxation is doing it wrong and needs to get a new advisor. This is easily avoided when properly structured.
When Should You Incorporate?
While many sole proprietors are reluctant to incorporate due to the time and paperwork required, there are a number of signs that incorporating your operation is a good idea:
- Your company generates more than $60,000 per year and you’d like to gain corporate tax advantages.
- You wish to formalize your business, which makes it more professional and will attract more clients and investors.
- You want access to credit or loans, which requires you to open a corporate bank account so that you can organize your finances and build credit to obtain approval.
The best way to incorporate your business is to schedule an appointment with a CPA (Certified Public Accountant), Advisor or even attorney who can go over the options that are available and help you with the paperwork.
What Happens Once Your Business is incorporated?
Once your business has been incorporated, you’ll have a company that is legally separated from you. However, it must be emphasized that LLCs, though considered separate entities, are different from corporations. You’ll have to pay corporate taxes on any profits you generate but you also have the option of selling shares to the public.
The majority of businesses in the United States are and will remain sole proprietorships. Most of these operations are small but they should go through the process needed to become incorporated. In fact, no business is too small to incorporate because no business is safe from lawsuits. For instance, a hot dog vendor in New York City would be considered a sole proprietor. They probably make less than $60,000 annually and have few assets other than a cart and equipment. However, if a customer becomes sick from eating the hot dogs, this hot dog vendor will get sued. If he has incorporated the business, the corporation, and not the vendor himself, would have the liability; his personal assets would not be in jeopardy. On the other hand, an entrepreneur that owns a restaurant in downtown NYC that makes more than $250,000 a year and owns a house outside the city in the suburbs should definitely incorporate.