When Should You Consider Incorporating Your Small Business?

Author: Deborah Sweeney | June 19, 2021

There are several moving parts to consider when you decide to incorporate your business. Many entrepreneurs start by thinking about different entities, like a sole proprietor or limited liability company, they may choose to incorporate as that suits their needs. In addition, some may question when it is the best time to incorporate or if it is necessary to incorporate a business at all.

While this may seem like a lot of information to consider, the process of incorporation is actually much less overwhelming than it appears for entrepreneurs. Here’s a breakdown of the basics you need to understand before incorporating a business.

Choosing an Entity

The entity formation you choose to incorporate your business will depend on a few factors. You will need to consider the type of business you are starting and plans to grow and expand the company over time. Some of the most popular entities include these three structures:

  • Sole Proprietorship. Almost every small business starts as a sole proprietorship, which is often referred to as a default entity. A sole proprietorship allows the owner of the company to exercise complete control over the business. This may be an ideal option for an entrepreneur that wishes to be the boss, as a sole proprietorship is responsible for everything that impacts the business. However, a sole proprietorship does not have limited liability. Without this added benefit, the business owner may be held liable for both good and bad things that impact the company. A sole proprietorship is also not privy to receiving as many tax benefits due to the unincorporated nature of the business. This means a sole proprietor is fully responsible for paying self-employment taxes to cover their Social Security and Medicare obligations. At times, this may amount to thousands of dollars — and can feel like a bit too much tax responsibility. 
  • Limited Liability Company (LLC). An LLC is a popular entity formation to incorporate your business. LLCs have a flexible management structure, allowing more than one owner (member) to run the company. Limited liability protection is one of an LLC’s primary benefits. This creates a separation between the assets of the owner and the business. The separation ensures that the owner’s belongings, like houses and cars, are not used for collateral in the event of an unforeseen circumstance, like a lawsuit. An LLC may also choose the manner in which the entity would like to be taxed. LLCs, which are pass-through entities, are treated and taxed as partnerships on the federal level. They may elect to be taxed as another pass-through entity, such as an S Corporation. The result of that election means a limited liability company is able to avoid significant self-employment taxes.
  • Corporation. This entity may be ideal for incorporating a business that has plans to create a global presence or offer an IPO. A corporation is a highly structured entity formation. Incorporating as a corporation means the business needs to elect a board of directors and corporate officers, take corporate minutes during meetings, and establish bylaws. Corporations may also issue shares of stock and sell percentages of the business to its owners (shareholders). 

There are even more entity options available to incorporate your business. Some of these include partnerships, C Corporations, and S Corporations. If you are unsure as to which entity is the right fit for your business, meet with a legal or tax professional. Ask any questions you may have about the incorporation process, so you have peace of mind in moving ahead to incorporate your business. 

Best Time to Incorporate a Business

Is there a specific time of the year where it’s ideal to incorporate a business? Here’s an inside tip. There is no “best” or “worst” time of the year to start a business. 

You may find, depending on your offerings and services, your company does well seasonally or has specific quarters where sales are strong. Consider such seasonal factors when deciding when you should start and incorporate a business. Planning a launch to happen prior to a peak in holiday tourism is one common strategy, whereas others prefer to launch at the start of the calendar year. “Start a business” may be a popular New Year’s resolution, which is why many entrepreneurs use the last few months of the year to draft business plans and prepare for a January launch. 

In the event that you decide to start a business towards the end of the year, you may find it’s advantageous to consider a delayed filing rather than file a standard incorporation filing. This allows you to file your paperwork for the delayed filing and set an effective date of incorporation. This date is usually scheduled for about 30 to 90 days out into the future. Once the effective date arrives, the business’ incorporation paperwork will have been completed and the company will officially be in existence. This gives you the chance to start the year with a brand-new business. As a bonus, setting the effective date for the new year means that your business is not obligated to file or pay taxes or conduct annual maintenance for the previous year because you were not officially in existence. 

However, keep in mind that not every state allows delayed filing requests. You may need to check in with the local Secretary of State to determine if your state of incorporation offers delayed filings and how you can reserve a date.

Why Should You Incorporate a Business?

Is it a good idea to incorporate your business? Technically, a small business may remain in its default entity as a sole proprietorship. It is still possible for a business to operate as an unincorporated entity. 

However, unincorporated businesses may not realize that incorporation has many long-term benefits. When you incorporate your business, you receive limited liability protection. Tax responsibilities are lessened when electing a pass-through entity. It is easier to build business credit and to establish credibility with consumers. The credibility your business has, from industries ranging to medical to retail, allows the company to develop a strong brand reputation.

As mentioned earlier, any entrepreneur that feels unsure about incorporating their business may wish to speak with a tax or legal professional. They may answer questions you have about the best entity for your offerings, states you may consider incorporating in, and how to elect a pass-through entity for tax purposes. Perhaps You’ll leave feeling more confident and secure once learning about the incorporation process.

Deborah Sweeney is the CEO of MyCorporation.com which provides online legal filing services for entrepreneurs and businesses, startup bundles that include corporation and LLC formation, registered agent services, DBAs, and trademark and copyright filing services. You can find MyCorporation on Twitter at @MyCorporation. 

Fundbox and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

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