6 Reasons Why You Should Incorporate Your Small Business
For all the hype and promise of wealth surrounding Fortune 500 company employment, nothing beats actually owning your own business. It is tough work but it has immense advantages. And yes, it has made more people wealthy than any Fortune 500 company or investment.
However, when many employees finally break free from the 9 to 5 grind and start their own businesses they soon find out that they are merely replacing one job with another. Sole proprietorship can give that feeling. This is not to say that running a privately owned business is an absolutely bad idea but like every other business structure, it has its disadvantages.
With a sole proprietorship the burden of your business is entirely on you – its ultimate success or failure is yours to bear and yours alone. But on the flip side, running away from starting your own business is not the answer.
Entrepreneurs and their startups are the spine of the economy of any nation.
Still not convinced? Here is a little something to aid you with that:
In 2012, according to the U.S Census Bureau data:
- There were 5.73 million employer firms in the U.S and companies with less than 500 workers constituted 99.7% of those firms. Also businesses with less than 20 workers made up 89.6%.
- Adding the number of non-employer jobs brought this figure to 23 million jobs in 2013. Also, the share of U.S businesses with less than 20 employees increased to 97.9%.
- According to the SBA’s Office of Advocacy: Small businesses accounted for 63% of the net new jobs created between 1993 and mid-2013 (that is 14.3 million of the 22.9 million net new jobs).
So yes, small businesses are here to stay.
Look beyond this at the bigger question: how to run your business without running yourself into the ground or breaking down. Incorporating your small business might just be the answer to your business problems.
Why all this talk about incorporating, you may ask?
Here are some of the top reasons why you should incorporate your small business.
- Your business gains legitimacy and credibility
Besides the sense of satisfaction, pride and formality that comes from seeing the glowering “Inc” at the end of your business name there are other benefits that comes to you once you take that bold step and incorporate your small business.
It gives your business that much needed extra assurance in its image. People feel safer doing business with a corporation because they feel it is not a here today gone tomorrow kind of business. The Inc gives your business an assertiveness that will lead people to believe that your business is a solid establishment.
It makes your business as a whole more accountable to the customers thereby increasing your business’s legitimacy and trustworthiness.
2. It makes it easier to source for funds
Want to raise capital for your startup easily? Incorporate it. Banks, angel investors, venture capitalists and other related organizations have one thing in common: they all find it easier to invest in the corporations than sole proprietorships.
Notice that I used the word “invest” not “fund”. This is because if you incorporate your small business, it says to them that you are a serious business owner and they can go into business with you. It also dispels any fear of what might happen to their investment if the business goes sideways.
This is because with a corporation, there are legal ways for an investor to go about recovering his investment that are easier and less messy than going after the business owner’s personal assets.
3. It separates you from the business…in a good way
You must have at one point, seen or heard of how some formidable company came tumbling to its knees and folded up. Stories abound about how it lost its market share, and eventually profits. How it filed for bankruptcy, the ensuing vicious legal battle and how creditors came after the business with everything they had and sent it plunging to its demise.
Let us imagine that you are the owner of such a business, you will be the one to bear the brunt of the blow.
You know why? Because you are the sole owner of the business hence, are liable for everything that concerns the business. Signing checks and sourcing for funds for instance are all activities that will be carried out in your name. There is no separation between you and your business and as a result creditors can come after your personal assets if your business fails.
But what happens when you incorporate your small business is that doing so automatically prevents you from being wiped clean. Incorporating your startup automatically separates your personal assets from the business’ assets.
This way if the business has issues, creditors can only come after the business assets. You are protected from the ensuing onslaught. This is because the business has become liable for itself.
4. It prevents misunderstandings among founders/partnerships
Running a business alone is already enough trouble on its own. The situation becomes even more problematic when the business has more than one founder/owner. There is a high probability that arguments will break out over ownership of the business.
Incorporating the business and issuing stock to the founders/partners will kill any misunderstanding about how equity should be split.
5. It allows you to issue stock options
Let you are just starting your business or want to expand your already existing one and you are strapped for cash. Stock options is another way to get the funding that you need without taking out a loan or relying on venture capitalists.
Many entrepreneurs will offer stock options or offer the opportunity to purchase equity at a low price to employees, customers or contractors. It is easier for already established businesses to leverage this option of pooling capital, nevertheless it still works for startups.
Most companies get more funding this way than with VCs and institutional loans.
6. It allows you to transfer ownership of your business to someone else
Incorporating your business is more or else a way of guaranteeing – barring any personal tragedy – that your business outlives you.
A corporation, now a distinct entity may be passed to someone else in the event of the owner’s retirement or death.
Many businesses owners leverage this advantage to ensure that their business stays within the family and guarantees their financial security going forward.
What’s your view on incorporating your startup? Are there more benefits that I didn’t mention here? Let’s talk in the comment section.