Local Voices

When is the Right Time to Incorporate Your Small Business?

Your business, like many, may have started as a side project. Your neighbor knows you’re good at landscaping, so he asks you to fix up his yard. Before you know it, you’ve quit your day job to keep up with demands for your services. To meet the overwhelming demand, you hire a team of employees and take out loans to purchase more equipment.

Now you’re running a successful landscaping business, and you’re making good money. But lately you’ve been wondering; what happens if the business slows down and you can’t repay all the debt you owe? What would you do if an unsatisfied customer or disgruntled employee decides to sue you? As a sole proprietor, you’d be held liable for debt and legal judgments made against the business. These actions leave your personal assets exposed.

Incorporating your small business creates a separate legal entity, which will shoulder the liability burden so you won’t have to carry it on your own. So the question remains: when is the best time to incorporate your small business?

Perhaps you’ve been mulling over the idea for some time now, but just haven’t made time on your daily calendar to start the process. There’s no time like the present, and the honest answer to that all-important question is – right now.

The sooner you incorporate, the sooner you’ll start getting the rewards of business incorporation; legal protection and tax savings. But in reality, things are not always so cut and dried. In the real world of business, there will always be factors to influence your decision as to when you incorporate.

How Costs Affect Timing
The professional and filing fees for incorporating a business will cost a few thousand dollars. If cost is a prohibitive factor, postponing incorporation could make sense if your business has low legal risks and low liability. But as the business grows, the need for incorporation should be treated with urgency.

It doesn’t mean that incorporating later will be any less expensive. You’ll have to transfer your business assets into the corporation and register the accompanying tax elections. At this stage, the cost of incorporating will have almost tripled, but at least you’ll now have the income to justify the expense.

Other Considerations
Is your business already up and running? Immediate incorporation makes sense if you're already doing business. Incorporating will provide limited liability protection right away, so your personal assets will no longer be at risk.

If you form your corporation before the year’s end, you’ll need to find the money and time to file two tax returns, but the expense will be offset by the savings on the self-employment taxes.

Is your business not yet in operation? Assuming you won’t start running the business until the next year, you could delay your incorporation to avoid paying taxes and other fees. That said, there’s always a benefit in incorporating when you have the time to devote to this important process. Waiting until the demands on your time mounts could result in unnecessary and costly delays in forming the corporation.

An additional risk of waiting could be losing the name of your business. Another business could easily snatch up your intended business name while you’re mulling over your options. The name of your business is an important key to your success, so take immediate steps to secure your name.

With all the advice provided, when is it time to incorporate? The answer is simple.

If your business has no anticipated losses and very little legal risks, you can start as a sole proprietorship. But you must revisit the idea of incorporating once your earnings and risks increase. Keep the thought of incorporating in your mind, and take swift action when the time is right. 

Ivan Widjaya is the Founder/Editor of On SMB, a small business news online magazine, and several other small business blogs.

This article is sponsored by Wells Fargo Works. Watch the video series, then enter the contest where you could win a similar experience, including $25,000 for your business. Watch the videos and enter the contest here.


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