The Pros and Cons of IncorporatingFebruary 14, 2017 1:27 pm Leave your thoughts
Business ownership is a series of decisions. From the logo to the location, the services provided to the people hired, they're all important elements to developing an identity, which is particularly important in the start-up stage.
While entrepreneurs come to different determinations, one that they all share is the question about what to be designated as, in the legal sense. Millions of budding business owners have chosen to incorporate after doing their own cost-benefit analysis.
But before you determine whether incorporating is the right move for you and your company, it's important to lay out the advantages and disadvantages. Here are a few of them, starting with the positives:
Availability of capital
The mere phrase "corporation" invokes a sense of authenticity, one that is an indication to a given community that a company is open for business. This status makes access to capital easier to come by than other legal entities, like a partnership or sole proprietorship, as two examples. In other words, if you need to apply for a loan with a lending institution, the odds of your being approved tend to be more favorable than unfavorable.
Stronger protection from liability
Largely viewed as the most advantageous element of incorporating, liability isn't as significant under this type legal entity banner. Regardless of the product or service, there's always the chance that business owners may be held liable for incidents or scenarios in which harm was done. But because corporations have their own status that is separate from the business owner, he or she doesn't have to risk the loss of personal property.
There's no denying that incorporating requires a lot of paperwork, but once all the t's have been crossed and the i's dotted, corporations exist forever more. This means that even if shareholders diminish or there's a change in the management structure, the corporation itself won't go away.
On the opposite end of the spectrum are the downsides of incorporating, which should be given equal weight as the plus sides:
Because there are a lot more working parts to running a corporation as opposed to a sole proprietorship or partnership, costs tend to be more significant as a result. For example, there are fees associated with incorporating that other legal entities don't have to deal with. Additionally, there needs to be a paper trail when significant decisions are made, which can sometimes lead to lost productivity. Corporations tend to be taxed at a higher rate as well compared to smaller entities.
Reams of paperwork
As previously referred to, corporations are larger and their decisions have wider effects. Thus, the decisions rendered have to be kept track of for taxation and regulatory purposes. Also, because there are multiple elements to a corporation – from the shareholders, to the staff, to ensuring the proper compliance protocols – they all need to be catalogued.
Difficult to disband
A corporation's ability to exist in perpetuity is a bit of a double-edged sword. Yes, there is comfort in being forever established, assuming it's successful, but if a corporation fails to turn a profit or something else happens that necessitates its disbanding, the lengthy process can be both time consuming and frustrating.
We at the Law Offices of Donald W. Hudspeth like to say that our business is your business, or more specifically, "The business of our firm is business." And among our services is helping you determine the legal entity that makes the most sense. Contact us today and we'll help you get your firm up and running.
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