This article was created by BlogHer for LegalZoom.
“When should I incorporate my business?” is a common question asked by many business owners. There are many benefits to incorporating, but if your business is small, you may wonder whether a corporation is necessary. It’s understandable that, to keep initial costs at bay, you start your business as a sole proprietor, but as your business grows you will want to take the necessary steps to ensure your company is deemed official.
The most common reason to incorporate a business is to limit your personal liability for business obligations. This can be a good idea if you have lots of outside contracts.
Also, according to LegalZoom, because a corporation’s ownership is contained in shares that are easy to transfer from one owner to another, a corporation is a good choice if you’re planning to sell the business or attract outside investors. And unlike a sole proprietorship or general partnership, a corporation continues to exist beyond its founders’ lives. But while there are a number of reasons to incorporate, how do you know when it’s time to do so? And how do you avoid common mistakes? Here are some signs to watch for, according to law firms.
Your team is growing
When most people start a business, they’re running it solo or with very few employees. But as your business grows, you soon realized you need more people to help. Before you go through the hiring process, it’s worth considering business incorporation. As you bring on more employees, doing so will make it easier to process payroll and negotiate contracts. Plus, if your business is making a profit, incorporating can provide you with certain tax benefits.
You are looking for investors
Part of growing your business lies in the power of investors. You could invest your own money, but you may not have enough capital. If you plan to seek out investors, then you’ll need to prove your business is doing well and incorporating can help you meet the requirements for many investors and banks. Similarly, if you’re looking to grow your clientele, it’s a good idea to incorporate as some clients, particularly government departments, may require their independent contractors to be incorporated.
You’re moving to an office
When you have a small business, you’re probably working from home. But, you will eventually need an office space as more employees are brought on in the company. With the pandemic and a huge shift to businesses allowing employees to work from home, this may not seem like an immediate sign, but as life shifts back to normal, it will definitely be something you want to keep in mind. Incorporating before you make the move will ensure you and your personal assets are protected if anyone gets injured on the business property or if the business struggles to fulfill contractual obligations.
You want better benefits
If you’re single and only supporting yourself, then you can get by with minimal income and insurance, but if you have a family to take care of, incorporating your business allows you to buy health insurance. Additionally, if you wish to transfer your business to your children one day, being incorporated increases flexibility and your ability to effectively tax plan when creating a progression plan.
You want employees to have a stake in the business
There are many reasons employers would want to consider giving employees a stake in the business from retaining talent to making them more invested in its overall success. But no matter the reason, it can only be done if you set up your business as a corporation. There are different forms of business corporation and steps on how to form a corporation, so if you find your company showing any of the signs, make sure to consider your corporations options so you can go the route that’s best for you.