10 Benefits of Incorporating Your Business

Incorporating any business is a huge decision. Perhaps you’ve just opened your doors, and you’re doing well. On the other hand, maybe your business hasn’t even gotten off the ground just yet. Or maybe your business is well-established and has been doing consistently well for years.

Either way, incorporating is a good decision for most businesses, and it’s not just reserved for those that are well-established.

There are several benefits to incorporating your business in the United States, all of which you should fully understand before you decide what’s best for your business. 

First, let’s talk about what exactly it means to incorporate a business.

What does it mean to incorporate a business?

Incorporating a business is the process of making your business a distinct legal entity to form a company or corporation. It involves changing ownership so that your business is separate from its shareholders and is no longer a sole proprietorship.

Essentially, you’re registered with and formally recognized by the government. 

We’ll talk about the benefits of incorporating your business you should know before you take the leap.

We’ll also provide an overview of some of the disadvantages of incorporating your business.

1. Protect your personal assets from creditors

There’s no doubt that running your own business is exciting. But with that excitement comes the reality that accidents happen and (unfortunately) businesses sometimes fail. This is where one of the best benefits of incorporating comes into play. 

By incorporating your business as a Limited Liability Company (LLC), or a C or S Corporation, you are protecting your personal assets from business debts. If your business falls on hard times, your personal property is typically off limits to collection agencies. For example, you will not lose your home because you failed to pay your business loan.

If you haven’t incorporated your business, your personal assets are linked automatically to your business. This may include your car, your home, your investment accounts and even assets you obtain in the future. Additionally, if you were to file bankruptcy within your business, your personal assets could be used to repay your debt. 

If you were to file personal bankruptcy, your business could become an asset that can be liquidated to repay your debts. Incorporation protects your business from all of these scenarios.

2. Protect your personal assets from lawsuits

Keeping you and your family safe and secure is a huge benefit of incorporating a company. Without incorporating, your personal assets may be at risk to anyone filing a lawsuit against your business. That means if a customer trips or slips in your store and takes you to court to collect damages, you may be personally liable. 

These individuals could try to collect on a judgment against you, for example, by taking possession of your home. Incorporation creates a solid barrier between your personal assets and legal claims against your business. If your business is sued, your personal and family possessions will generally not be at risk. 

3. Tax benefits

Another benefit of incorporating your business, and one of the most crucial to leverage, are the many tax deductions that are available to incorporated businesses. When you go from being a sole proprietor to a business structure such as an LLC, there are numerous deductions at your disposal that are not available to individuals. Specifically, you may see tax benefits such as:

• The ability to spread out your losses over a larger period of time 
• The ability to deduct startup and operational expenses 
• The ability to deduct employee benefits 

Your local and state taxing authorities may offer incentives to you more readily if you are a corporation. Plus, businesses with more than one location will benefit greatly from tax deductions because taxes generally become more complicated as your business grows.

Here’s a closer look at some of the key tax advantages of incorporating your business.

Lower corporate tax rates

One of the advantages of incorporation is access to potentially lower corporate tax rates compared to individual income tax rates. This can result in substantial tax savings, particularly as your business grows and generates higher revenue.  

Deductible business expenses

Incorporated businesses have the opportunity to deduct a variety of business-related expenses. These may include costs like office supplies, travel expenses, marketing efforts and even professional services. This can reduce the overall taxable income of your business, making incorporation a financially savvy decision.

Ability to defer taxes

Incorporated businesses often have more flexibility when it comes to tax planning. For instance, corporations may defer taxes on retained earnings, allowing them to use those funds to expand their business without immediate tax implications.

Employee benefits as deductions

Another significant tax advantage of incorporation is the ability to deduct employee benefits. This includes health insurance, retirement plans and other perks offered to employees, which can lead to both financial savings and enhanced employee satisfaction.

Access to state and local tax incentives

Many state and local governments offer tax incentives and credits specifically for incorporated businesses. These incentives are designed to promote business growth and may include reduced tax rates, grants, or other financial benefits tailored to your specific industry or region.

Keep in mind, however, that tax laws are complex and it’s best to consult a certified accountant before claiming any deductions.

4. Easier to raise capital

Incorporating generally makes it easier for your business to raise capital or apply for a loan by giving a sense of legitimacy to your business. When you incorporate, it also means you can open up a bank account and start building a line of credit, which, for a small business owner, is a necessity. 

And if you plan to expand your business, whether that’s online or in-store, you’ll have a much easier time doing so when there are fewer barriers to raising capital, something that’s common for businesses that aren’t incorporated.

5. Build a better reputation

Your business’s reputation isn’t just based on the amount of Yelp and Google reviews you get or the good work you do within the community. Incorporating can help establish your legitimacy with potential customers. This is a huge plus for your business’s branding. 

If customers are shopping online and come across your business, they are more likely to view you as a trustworthy place to shop if you are incorporated. It lends a sense of credibility to any business. 

6. Protects your brand

Your brand is more than a logo or a marketing phrase. It’s the way you operate your business, the look and feel of your location and the type of products you offer. When you incorporate your business, you’re not just protecting its name. You’re also protecting the business’s overall image from being used in undesirable ways or without your consent. 

Businesses of any size should prioritize protecting their brand. For those that are larger, it’s a double-edged sword: a larger online footprint and strong brand visibility may put you at higher risk for brand plagiarism, but you also probably have more power and money to take action against plagiarism.

For smaller businesses, lower brand visibility may help you fly under the radar when it comes to brand plagiarism, but if you are plagiarized, it can be harder for you to take action against plagiarism or prove such claims. That’s why incorporating comes in handy for businesses of all sizes. 

Incorporation allows you to protect:

• Your business name (be sure properly organized does not register it before incorporating)
• Your brand recognition (visual cues like logos, slogans and colors that represent your brand)
• Your trademark (any phrase, symbol or design that distinguishes your business from others)

7. Perpetual existence

Legally, by incorporating, you can protect your business forever. Your business can still be sold or closed, but if neither of those things happen, your business will be in perpetual existence because it is its own entity. It’s much easier to put your plans for business growth into action, even if there are hiccups along the way. The business can remain operational and profitable, no matter what happens to those who are involved in the business. Here are a couple of reasons why that matters:

• It gives you the ability to create a long-term plan for growth within the business
• The business can remain operational without the need to reestablish itself multiple times

Perpetual existence becomes a powerful and necessary tool for any business that wants to establish a strong foundation from which to grow. 

8. Easier to transfer your business

Let’s say that you want to pass your business on to your children as you get older, but only want to do so in the event of a sudden illness. It may be easier to transfer ownership and funds when the business is a corporation than it is if you are running a sole proprietorship. 

Whether for short-term or long-term goals, your business will benefit significantly from incorporating for this reason alone. Transferring funds and business ownership is easier when the business has its own identity.

9. Your business can grow after you’re gone

When your business is a corporation, it is its own entity. It continues to exist even after you’re gone as if nothing has changed. Your business will likely need a new head, but the business doesn’t halt.

You might be wondering if this still applies to those who plan on leaving their business to their heirs. The simple answer is yes. When a person passes away, their entire estate (which would include any businesses they own) generally goes through a probate court. The value of the estate is used to repay debts, including any mortgages, loans or medical bills they might have left after passing. Only after all of this happens does whatever is remaining pass to any heirs. That could be much less than the value of your business.

When properly organized, your business may not have to go through probate proceedings.

10. Stronger record keeping

When your business is a corporation, the U.S. government requires you to provide way more details at tax time. You’ll need to supply them each year, which may mean paying a bit more for a tax professional and detailed bookkeeping. Although additional record keeping is often seen as a disadvantage to incorporating, it means you’ll have a clear, accurate picture of the overall health of your business, which is a benefit in our view. 

Detailed records can help you secure a loan from a lender and give you insight into your expenses, your profits and where you can make key changes to improve the business’s financials. You can find some of this information in your POS system, but being diligent is usually a great move. 

11. Liability protection

One of the key benefits of incorporating a business is the robust liability protection it provides. Incorporation separates your personal assets from your business liabilities, meaning your home, car, and savings are generally shielded from business debts or lawsuits. 

This is a crucial advantage of incorporating, especially for business owners who want peace of mind in the face of potential financial risks. If your business faces legal claims or financial difficulties, your personal property is typically protected, as the corporation itself is treated as a separate legal entity. 

If you’re looking for another reason on why incorporate a business—liability protection is a compelling one.

12. Credibility and perception

Incorporation can signal professionalism and stability to customers, suppliers  and investors, helping you build trust and attract opportunities. 

Many larger suppliers and clients prefer to work with incorporated businesses due to their perceived legitimacy and reduced risk. And as far as the other significant benefits of registering a business, this also also extends to funding opportunities, as investors are more likely to support businesses with a formal corporate structure. 

So, why do businesses incorporate? Establishing a credible and trustworthy image is a key reason, opening doors to partnerships and fostering confidence in your operations.

13. Employee benefits

Looking for more benefits of incorporating a business? Here’s another one: You have the ability to offer attractive employee benefits, such as stock options, retirement plans and health insurance. 

These perks not only enhance employee satisfaction but also help your business attract and retain top talent in a competitive market. Stock options, in particular, give employees a vested interest in the company’s success, which then fosters loyalty and long-term commitment. This is one of the key advantages of incorporating, as it allows your business to compete with larger organizations in recruiting skilled professionals.

The disadvantages of incorporating your business

Now that we’ve covered the benefits of incorporating a business, let’s go over some of the disadvantages.

It can be costly to incorporate a company

Becoming a legal entity is a complex endeavor. It can become costly due to the initial cost of incorporating, attorney fees, tax filing fees and other ongoing costs (both administrative and legal) that you wouldn’t necessarily see with sole proprietorship. 

Lawyers can charge more when their clients are registering with the government, so keep that in mind if you plan to incorporate. A certified accountant can help you determine whether it’s feasible for you to incorporate. 

Paying state and federal taxes

Although there are plenty of tax benefits to incorporating (as we discussed), double taxation can be a drawback. Incorporated businesses are subject to both federal and state income taxes. That means any profit you make is taxed twice.

Incorporating a company may lead to stricter protocols and obligations

As a legal entity, an incorporated business must follow strict legal protocols and obligations. You’re subject to much more legal oversight than a sole proprietor. There’s nothing inherently wrong with this, of course—it’s just something to be aware of before you incorporate.

These protocols include following bylaws and government statutes, keeping meticulous records of everything from tax records to shareholder information to certifications, and more. 

Like we said earlier, having a comprehensive overview of your business through detailed records is a huge plus, but it can complicate certain aspects of your business, especially if you’re not used to following strict formalities as someone who once ran a sole proprietorship. 

Think about your business, long-term

While it may not be necessary for all businesses to incorporate, most of the time, businesses do benefit from going through the incorporating process. Though it may seem like a daunting task at first, with numerous resources available to help you, it doesn’t have to be. It may not be as time taxing or expensive as you think. 

Getting ready to grow your business? Chat with us to find out how a cloud-based POS system can track valuable business data, so you can stay organized and grow your business more quickly. 

Frequently asked questions (FAQs) about incorporating your business

What does it mean to incorporate a company?

Incorporating a company involves forming a distinct legal entity for your business. This separates the business’s liabilities and obligations from its owners, providing protection for personal assets and granting the business formal recognition by the government.

What are the benefits of incorporating a business?

The benefits of incorporating a business include liability protection, tax advantages, enhanced credibility, easier access to capital, perpetual existence, and the ability to offer attractive employee benefits like stock options and retirement plans.

What are the advantages of incorporation over a sole proprietorship?

Some key advantages of incorporation over a sole proprietorship include:

• Shielding personal assets from business liabilities
• Easier capital raising opportunities
• Lower corporate tax rates
• Enhanced credibility with customers, suppliers, and investors

What are the four advantages of incorporating?

Four advantages of incorporating a business include:

1. Liability protection for personal assets
2. Tax benefits, including deductions and deferred taxes
3. Perpetual existence of the business
4. Improved credibility and perception with stakeholders

These are some of the most common ones, but there are definitely a lot more reasons businesses decide to go the incorporation route.

What are some of the disadvantages of incorporating a business?

While there are many benefits of incorporating, some disadvantages include higher costs, double taxation for certain business structures and stricter legal and record-keeping requirements.

Is incorporating suitable for small businesses?

Yes, incorporation can benefit businesses of all sizes. While it might seem daunting for smaller businesses, the advantages of incorporation, such as liability protection and tax savings, often outweigh the initial costs and complexities.

How does incorporating help with employee retention?

Incorporated businesses can offer employee benefits like stock options, health insurance, and retirement plans. These perks not only improve satisfaction but also help retain top talent in competitive industries.

What are the tax benefits of incorporating a business?

Tax benefits include lower corporate tax rates, deductible business expenses, deferred taxes on retained earnings, and employee benefit deductions. Consult a tax professional to fully leverage these advantages.

Editor’s note: Nothing in this blog post should be construed as advice of any kind. Any legal, financial or tax-related content is provided for informational purposes only and is not a substitute for obtaining advice from a qualified legal or accounting professional. Where available, we have indicated the first-hand sources of the information contained in this blog post. While we strive to provide accurate content, we cannot be held responsible for any actions or omissions based on such content. Lightspeed does not undertake to complete further verifications or keep this blog post updated over time.