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3 Reasons to Incorporate (and 1 Reason Not To)

March 12, 2013


Many of my business clients are small businesses on their way to being big businesses. The question of whether to incorporate or not doesn’t actually come up often. My clients usually retain me after that decision has been made.

However, some readers may be in doubt about what they should do. Many people with small businesses could benefit from incorporating and I’m going to give a few reasons why.

Before we get to the reasons to incorporate- What does it mean to incorporate?

Incorporation is creating a separate legal existence for a venture, usually a business venture, but not always. Incorporation is accomplished by registering the entity as a corporation or a Limited Liability Company (an “LLC”) with one of the 50 states. This costs around $50-$100 depending on the state and which entity you choose.

Once that’s done, the corporation or the company is a legally recognized entity separate from its owners. The company can do business, make contracts, sue in court, and do many other activities.

Now 3 reasons to Incorporate (there are many more):

1. Limited Liability- if you own an incorporated company and that company is sued, or owes money, your personal assets are safe from that debt or liability. (Note: this won’t apply if you do something unlawful or negligent).

2. Raise Investment Capital- whether you want to raise $100 million or $10,000 one way to do it is by offering shares or interests in your corporation. You can’t do that without incorporating.

3. Recognition- Almost all serious businesses are incorporated (or are partnerships). Make your company look professional by incorporating.

And 1 reason you might not want to incorporate:

1. Paperwork- Once you incorporate that State and the IRS want to know what’s going on with your new entity. You may have to file a separate tax return. Most states will require yearly filings. So, if the thought of filing out a form makes you break out in hives, beware.

As an attorney, I would almost always recommend incorporating. However, if you have a small business and your clients never come to your home or office and there isn’t a lot of money at stake in any single transaction (I’m thinking about an EBay seller or someone like that) you could consider forgoing the extra expense and time that incorporation entails.

  1. Walter Jacoby permalink

    very good summary. I’ve been thinking of incorporating my home-based business. something to think about…

  2. One reason to inc. The VentureDOCs Legal SaaS portal went live March 5th @

    Here are the highlights.
    • Free NDAs
    • Free Termsheets
    • Free Incorporations

  3. Cindy Squier permalink

    I am a member of the Editorial Board of NALS . . . the association for legal professionals. I found your article, 3 Reasons to Incorporate (and 1 Reason Not To), to be very interesting. This topic would be a perfect fit for the Fall issue of @Law, the NALS Magazine for Legal Professionals. The @Law is a quarterly print publication with a distribution of 5,000 nationwide. @Law articles should be 2,000 words or less and submitted in Word format. The submission deadline for the Fall issue is June 1. Would you be interested in this opportunity?

  4. yechiel aaron permalink

    I would like to know more from you about forming an llc

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