For Solopreneurs: Should You Consider Incorporating Your Business?
So many small business owners are Solopreneurs. If this is you, you are not alone because according to a Small Business Administration article, there are 18 million business owners like you. The number of solopreneurs has grown significantly over the years as people like you decide to create something for themselves. Some of you choose to forge your own path because of the flexibility it brings, while others just want to work for themselves, rather than hold down a traditional job where someone else is making the rules. We all have our personal stories.
As an entrepreneur, you wear many hats and inhabit many roles, but most importantly you are the primary decision maker. Can you relate? Among the many decisions you need to make is whether to incorporate your business. This is a key one. Incorporation is something every small business owner should consider.
Think about it this way– We live in a society, unfortunately where people and businesses get sued at the drop of a hat. People love to file lawsuits. You aren’t exempt. Transitioning from a sole proprietor to a corporation or Limited Liability Company (LLC) is a strategy that will not only protect what is most valuable to you, but also provide you with additional advantages. Let’s explore what incorporation can do for you.
The main advantages to incorporating a business, in particular a small business, is asset protection. As a sole proprietor your business is not separate from you, the individual. Once you incorporate, your personal assets are legally protected. In the event, someone decided to sue you, or place a lien on your business, your personal assets would be protected. Your home, bank accounts, and any other personals assets can’t be touched.
Incorporating brings credibility to your business. It shows others that your business is not a fly-by-night operation, but one that is built on a strong foundation. This a big advantage for a small business. Potential clients and vendors often prefer to do business with corporations. When the time comes for you to raise capital or secure a business loan, having that corporate designation, makes you that much more credible to financial institutions.
Of course as a corporation or LLC, your business is privy to certain tax benefits that aren’t available for a sole proprietor. Know that those benefits are by consulting with a tax accountant who can outline the tax responsibilities and implication of a corporation, including the various forms of corporate structures, or LLC.
Your business name is gold and you want it treated as such. It is your brand and a major component of your business strategy and competitiveness. Protecting it is key regardless of the size of your business. Incorporating or establishing an LLC protects your business name at the state level.
So now that you understand the benefits. The next step is to decide what type of entity you should form; a corporation or an LLC. There are a few things to consider before you move forward. To help you, we are outlining the differences:
Limited Liability Company (LLC)
More and more solopreneurs are choosing to form their businesses as LLCs, the simplest form of a business entity. An LLC gives your business corporate protection with the tax benefits of a sole proprietor or partnership. You gain the benefits of incorporation, such as asset protection, coupled with pass through taxation. LLCs aren’t as formal as corporations, so the requirements are fewer.
You create an LLC by filing Articles of Organization or a Certificate of Formation with the Secretary of State. As the owner of the LLC, you are the member. Although there are no annual meeting requirements, you are required to have an Operating Agreement between the member and management that outlines how the LLC will be managed. This document lists the ownership of the company and any other operating guidelines.
Although there are solopreneurs that choose to form a corporation, it is a more formal type of entity. With this type of entity you must hold an annual meeting and minutes and bylaws must be maintained. If proper records are not kept in the corporate records, the corporate veil can be pierced. If that happens, that means that your personal assets will not be protected.
You can create a corporation by filing Articles of Incorporation at the state level. The owners of a corporation are called shareholders who own shares of stock within the corporation. The corporation is governed by the board of directors. And, the officers of the corporation run the day to day operations of the company. In the case of a solopreneur, in most cases, this can be the same person.
Now that we have outlined it for you, it’s your turn. Take some time to think about it. Think about the advantages of incorporating your business. And, review the different types of business entities and decide which one is best for your business scenario.
Share your thoughts with us. Are you going to incorporate? What do you think is best for your business?