If you've started your business already, or if you're getting ready to start, one of the first things you'll confront is whether you should incorporate your business. Depending on how much experience you have, or how much research you have done, you may know that you can simply start up a business at any time. Many times, I meet with new clients who have been working on a side hustle for a while. They've been doing a great job with their passion, but they are now ready to take that next step and incorporate their business to make it "official." While incorporating your business comes with certain advantages, they are often under the mistaken belief that without it, they can't run a business. In fact, you can run a business without formally incorporating it. There are benefits and disadvantages to doing it that way, but it's called a sole proprietorship, and there are many more of them out there than you would think.
Sole Proprietorships
A sole proprietorship is a business that does not formally incorporate itself with the state where it is located. While it may seem odd that an attorney would tell a client that they don't need legal work done for their business, there are many people who can run their business as a sole proprietorship and are very successful at doing so.
The advantages to a sole proprietorship include,
- No paperwork to start the business
- No annual filings with the state
- All of your profits and losses are reflected on your personal tax return
There are some disadvantages to it as well, like
- There is no liability protection for you personally
- It can be hard to get outside financing or business credit
- There can be tax advantages that you are unable to claim
There's a lot less that you need to do to start a sole proprietorship, but there are definitely advantages to incorporating as well.
Incorporating Your Business
There's more paperwork involved with incorporating your business, but with that paperwork come some significant advantages:
- Liability protection for you personally from business debts
- It's easier to get outside financing
- Tax election options (like an S Corp., C Corp.) are available
The main disadvantages that you'll run into aren't really as bad as you may think. Really, it comes down to a few that require more paperwork from you,
- Additional paperwork to get started
- Annual filings with your state
- May be subject to local business taxes
- More complicated tax returns
There are strong reasons to consider both a sole proprietorship and incorporating your business. Before you make that choice, if you've got questions, talk to a professional or someone who's been through it before to see what's best for you and your business.
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Next Steps
If you are considering starting a business and aren't sure if you should operate as a sole proprietorship or incorporate your business, let's set up a Legal Strategy Session and discuss the best options for you.
