What Are the Dangers of Incorporating? Weighing the Pros and Cons

Are the dangers of incorporating your business a gamble or a surefire bet? As a business owner, you’ve probably wondered if the risks of incorporating your business outweigh the advantages. The truth is that every small business has a different situation. You should weigh the pros and cons of incorporating to determine if it will benefit your business for the long run.

Let’s start with a few of the pros:

You’ll Probably Pay Less in Taxes

The government taxes individuals and businesses at different rates. In fact, if you run a business under your personal name, you’re most likely paying more than your fair share in taxes. Generally speaking, businesses pay less overall. Here are the five most common business structures:

  • Unincorporated sole proprietorship
  • Unincorporated general partnership
  • Corporation
  • S Corporation
  • LLC – Limited Liability Corporation

When incorporating your business, you’ll have to determine which of the structures fits your company model. This will determine which tax forms you must file. You must choose wisely. Ask a professional to help lead you in the right direction.

More Liability Protections

If you run a business under your name, all of your personal assets are at risk if you ever get sued. You don’t want to find your house or private bank account at the center of a judgment collection. Filing as an LLC, however, provides you with asset protection. This is one of the biggest reasons so many people choose to incorporate their small business in the first place.

It’s very important to note, however, that if you don’t fully operate under your company’s declared structure, you may lose these protections. The government refers to this as having an alter-ego. Work with an expert to ensure you’re running your company in a manner that is consistent with the rules of your business structure.

Now, let’s move to some of the cons:

The Initial Cost to File LLC Paperwork Is Expensive

No, you can’t just fill out a few documents and instantly become an LLC. Instead, you should expect to pay a variety of fees to file. First, you must file with the secretary of state. This will set you back a few hundred dollars, on average. LLC owners are responsible for an estimated tax prepayment, which varies based on the history of your business. If you want to make sure you fill out every form correctly, you’ll need to meet with a lawyer. These legal fees will add up. There are also other small filing fees that your business may owe.

Before you decide to file, make sure you have enough money saved up to pay for these fees. Get business advice in advance to make sure you know what to expect. Otherwise, you may find yourself in the red before you even get started.

You Need to Have an Exit Plan

If you ever decide to get to of the business, you need to have an exit strategy. Otherwise, your company will continue to operate in the eyes of the IRS. You’ll find your company owing more money than expected. An exit strategy will spell out how to handle significant changes, such as leaving members, removing members, or even death. Too many business owners never give an exit strategy a second thought. Unfortunately, they will most likely end up paying out of pocket for their lack of preparation.

Don’t Try to Become an LLC on Your Own

Incorporating your business may be a wise move. However, trying to navigate the paperwork by yourself may feel overwhelming. With many years of experience, our team at Incompass Tax, Estate & Business Solutions can help you take the steps necessary to become an LLC. We will help your company register and operate in a way that ensures your business stays in compliance with all regulations. Get in touch with our team to find out if the advantages outweigh the dangers of incorporating for your business.

Categories: CORPORATIONS & LLCs.