Founding and operating a new business can be a complex process. Many people decide to jump into business based on a good idea or a skill they have, without realizing all the questions they must answer and the challenges they will face in order to get their company up and running.
Unfortunately, there is a great deal of misinformation out there that can lead new entrepreneurs down risky, haphazard, and unnecessary paths. One common misconception is that, if you are the sole owner and employee of your company, your only option—or your best option—is to operate as a sole proprietorship.
That’s not to say that there are no scenarios where a sole proprietorship may be the right path for a new business, but there are a wealth of benefits to incorporating your new company, even when you are the only employee.
Sole proprietors are not limited to operating only sole proprietorships. When you are your company’s lone employee, you still have the option to incorporate as any business entity that you feel best suits your needs (with the possible exception of a partnership since you presumably have no partners).
You could form a single-member LLC, an S-Corporation, or even a C-corporation, and thus be entitled to the legal, financial, and business-related benefits inherent in each. You simply need to consider what your needs are as they relate to taxes, liability, and more.
Below we have detailed six reasons that entrepreneurs who are the lone employee in their company should still incorporate their business rather than remain as a sole proprietorship. Keep in mind, you should always consult with an experienced business attorney who can advise you on the best course of action based on your specific circumstances.
1) Asset protection
The single most important reason that anyone should incorporate their business is to limit their personal liability. Incorporation creates a legal veil of protection so that, if and when your business faces a lawsuit, your personal assets like your home will not be subject to those liabilities. Conversely, if you personally face a lawsuit, your business will have protection from seizure.
2) Taxes
If you choose to incorporate as an LLC, you will be taxed the same as if you were operating a sole proprietorship (taxes pass through to your personal income taxes), but you will also still have liability protection. Incorporation also allows you to choose an entity that best suits your unique tax needs. For example, corporate taxes can be lower than personal taxes, so you may be able to receive more favorable tax treatment by incorporating than you would as a sole proprietor or even as an LLC.
3) Credibility
Simply put, when potential customers see that your company is incorporated, they are more likely to trust that you are a legitimate business. An “LLC” or “Inc” moniker lends much more credibility to your company.
4) Auditing
No business entity is immune to IRS audits, but sole proprietorships tend to be the most highly audited business structure because they tend to have higher chances of the owner being disorganized, uninformed, or making mistakes on his or her tax returns.
5) Offer stock/equity as incentives
You may be your company’s only employee now, but do you have plans to hire any in the future? As an incorporated business, you will be able to offer potential employees stock or equity in the company as incentives to offset your inability to pay a high salary—a vital tool for any small, growing business.
6) Funding
Incorporation increases your company’s chances of receiving funding from angel investors or venture capitalists. Additionally, your ability to obtain a line of credit for your company should not be based on or impact your personal credit score if your business is incorporated.
If you are considering starting a business, and you are deciding whether or not to incorporate, please contact Integrated General Counsel today. We understand how difficult founding a company can be, and we are dedicated to providing you with reliable guidance and advice to help you achieve your business dreams.
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