Starting a business and driving it to success is a formidable challenge for even the hungriest, most seasoned entrepreneur. There’s plenty of competition out there (more than 30 million small businesses across the States, and counting), financial risks to consider, and a wealth of potential problems to overcome.
One choice small-business owners are likely to face at one time or another is whether to incorporate or not. This process transforms an enterprise into a corporation, recognized as a legal entity that exists apart from its founders and management team.
It might seem like a complex, daunting, and confusing prospect, but incorporating your business is simpler than you might expect. And there are several great reasons to do so.
Here are six reasons to consider incorporating.
1. Reduce the Risk of Conflict Between Founders
The subject of dividing equity can lead to conflict in businesses with two or more founders. This has the potential to create tension that lasts for years and ruins close friendships.
Incorporating your business enables founders to split ownership in a way that satisfies all parties. This takes time, discussion, and careful consideration. But once stock has been issued, who owns what will be made concrete in black and white.
It also makes it easier to transfer ownership and set boundaries in the bylaws that govern the company.
2. Help Secure Funding from Investors
Incorporated businesses will generally secure financing more easily than non-incorporated firms. Investors tend to prefer corporations due to the wider stock options, and the assurance that they’re giving money to a legal entity rather than an individual.
Taking out a loan relies on your corporation’s credit record, too, rather than your own. So don’t forget to take out a business credit card once you incorporate.
“Once you incorporate, you need to build the credit history for your company,” says Expert business bookkeeper, Joe DiSanto, founder of PlayLouder.com. “Corporate credit cards not only build that credit, they also make it much easier to track finances and company spending.”
3. Attract and Incentivize Workers Via Stock Options
Corporations can choose to incentivize or reward employees with stock options. This might be a way to attract skilled workers and secure their loyalty when you’re unable to pay a high salary. It also serves as an attractive extra on top of a competitive wage for those corporations with more generous budgets.
There are various options to consider (nonqualified stock, restricted stock, performance shares), so it’s best to speak with an expert before committing to a plan.
4. Safeguard Your Personal Assets
Starting a business can be dangerous if you don’t consider its legal structure. That’s because if you operate as a sole proprietorship, any legal action or debts from your business can be taken from your personal assets. That’s not good.
This is one of the major reasons that business owners think about incorporation or forming a limited liability company. Both structures separate your personal finances from that of the business. So if your business ever goes bust or gest sued, the damage is limited to the assets of the business and does not extend to your personal bank accounts and property.
5. Separate Your Home Life from Your Business Life
Keeping your personal life and work separate can be tough, especially when you run your business from home (as with more than 20 percent of small employer firms).
Being responsible for a growing company’s success and longevity places a huge amount of pressure on entrepreneurs, and you may feel inextricably tied to your business for the foreseeable future.
But if you incorporate your company, there’s a stronger natural distinction between you and the business due to a little extra legal formality. This helps establish a clear line between home and work, to cultivate a healthier balance.
6. Build Credibility for Your Business
With millions of small businesses in operation across the States, credibility can help yours stand out.
Prospects, suppliers, potential employees, and possible affiliates will likely take your business more seriously if they see it’s incorporated because that takes extra work beyond just setting up shop. Undertaking the incorporation process demonstrates commitment and ambition; you run a “real” business, rather than an enterprise which could be little more than a hobby.
This can make all the difference when trying to win new clients, especially in niche industries with many sole traders or freelancers.
This does not mean that incorporation is a magic bullet. As Alyssa Gregory says at The Balance Small Business, “credibility is much like respect: it has to be earned. It takes time to lay the foundation for trust, and consistency to grow it into a solid reputation based on credibility.” But being a corporation helps.
Incorporating your business is a big step, so take the time to think about the seven reasons explored above carefully.
Once your business is incorporated, it will appear more professional, structured, and credible to potential clients and investors. This can pave the way to great things down the line, provided you understand the steps you’re obligated to take after becoming incorporated.
Jay T. Ripton is a freelance technology, business and lifestyle writer out of Scottsdale. He loves to write to inform, educate and provoke minds. Follow him on twitter @JTRipton.