Watching your business flourish from the ground up is like watching your kids walk into their career for the first time. Amidst all the risks involved in running it, the rewards are worth it. As your business grows, however, you will be left with the choice of either incorporating it or leaving it unincorporated. Does incorporating your business mean a thing to how it functions?
Well, it does. Different state laws have different regulations that dictate how businesses and corporations will be run within their state borders. Additionally, an incorporated business will have to file its taxes in a different way when compared to an unincorporated business. Once you incorporate your business, you change how the law sees it as a group of partners or a self-employed venture into an independent legal entity.
Here are some more differences between the two to help you make the right decision:
Who Is Responsible For Business Liabilities?
Normally, businesses are supposed to be self-sufficient with the income they bring in helping to offset any liabilities. However, there are situations where your business will need some extra push in the form of business loans to stay afloat or even invest in even more beneficial technology. In case your business is unincorporated, you and your business partners, if any, will be obliged to settle any business liabilities that may come up.
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That means that if you default on a business loan, creditors are allowed to come for part of your assets to regain their investment. On the flip side, you will cut any ties you have to the liabilities of your business once you choose to incorporate it. However, the structure of your business will have to change depending on what side you choose in the S corp vs. LLC debate.
Transferability of Interests
Unincorporated businesses are barely independent of the owners as they have to deal with every liability themselves. As a result, it’s difficult to transfer the interest of the business to a new owner, without disrupting how the business functions. Of course, you can offer to share the assets of your business with third party participants, but it might be legally tough to transfer the interests.
On the flip side, incorporated businesses run as independent legal entities. This makes it easy to transfer ownership and the interest of the business with little friction. In case you would love to sell your business in the future, then incorporation is a wise move.
Incorporated Businesses Can Last Longer
Unincorporated businesses are dependent on the owner of the business. This means that the loans and contracts that the business runs on are in the name of the owner. Such a lack of independence can lead to the end of the business if you, as the owner, die.
On the other hand, incorporated businesses can last an eternity. Since they are independent bodies, they can be passed on from one generation to the next without affecting the state of the existing contracts and how the business works normally.
Who Owns The Taxpayer Status?
Paying taxes is mandatory for any business, and the fate of who pays the taxes will rely on the organization decision you make for your business. When running an unincorporated business, you will typically have to pay the taxes of your business as personal income along with your other partners.
Since incorporated businesses are independent entities, the government will tax them on their own. As a result, any income or proceedings that you make from the business will have to be taxed separately. In case you have shareholders in your company, your business might be liable for double taxation where its income is taxed and the dividends shared out to shareholders will be taxed too.
Conclusion
There are a variety of perks for incorporating your business or remaining unincorporated. The choice you make will, however, help in shaping the future or your business and in determining the type of regulations you have to adhere to. Assess the kind of future you would like for your business to make the right choice.
