Why Should I Incorporate My Small Business?

benefits of business incorporation

“My business is doing fine without incorporating.”

“I don’t see the need to spend the money and go through all that paperwork.”

These are common responses from some small business owners who are questioned about why they haven’t incorporated their business yet.

But knowing when or why incorporating a small business is beneficial can likely change some minds.

Benefit #1: To Protect Your Personal Liability

Incorporating your business separates you and your personal assets from your business.

Why does this matter?

Simply put, it stops anyone from coming after your personal assets in the event that money is owed by your business.

So you personal belongings like your bank accounts, real estate, vehicles, etc….these things are always at risk when you’re a sole proprietor.

Benefit #2: To Take Advantage of Tax Advantages

The potential tax advantages of incorporating your small business are enough to make most owners seriously consider it.

To briefly illustrate this advantage, here’s an example to compare:

A freelance writer making $60,000 a year as a sole proprietor would owe regular income tax plus self-employment tax on the whole amount.

In contrast, a freelance writer making $60,000 in a single-owner corporation has the option to leave some money in the business, or take distributions, which are not subject to the self-employment tax.

So the incorporated writer may choose to take $35,000 in salary and $25,000 in distributions. The writer can avoid paying self-employment tax on $25,000, which could save a lot compared to being a sole proprietor.

In conclusion, choosing to incorporate your small business is a move to protect yourself and to save money for your business.

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