How to Understand the Disadvantages of Incorporating

Many business owners equate the idea of incorporation with success. However, this is not always the case. Incorporating a business simply allows you to take advantage of certain legal and tax strategies, but this route is not for every business.

Instructions

Difficulty: Moderately Easy

Things You’ll Need:

• Computer with Internet access
• Accountant

1. Be aware that the government scrutinizes corporations closely. As a result, the cost of maintaining a corporation tends to be higher than simply running a sole proprietorship.
2. Know that, if you decide to incorporate, you will have to file not only your own personal tax return, but one for the business as well. Corporations must file and pay their own taxes. Depending on the complexity of operations, simply filing corporate taxes can be costly. Visit the IRS Web site (see Resources, below) to learn more about tax procedures for corporations.
3. Understand that since corporations shield the owners from corporate liability, they must follow stricter operational procedures. For instance, some states require corporations to retain a registered agent who is always available during certain hours to receive government and legal documents.
4. Understand that the disadvantages of incorporating may only apply to your business as it currently stands. In the future, there may be more advantages than disadvantages to incorporating your business.
5. Ask an accountant to lay out what your projected annual costs would be if you incorporate versus if you choose not to incorporate. She can also point out different benefits that you might have been unaware of.

Tips & Warnings

• To fully understand the disadvantages of incorporating, it's important to know the advantages so you can weigh the costs of incorporating against the possible benefits. This is where a conversation with an accountant can be quite valuable.
• Set aside several hours to work up a cost comparison analysis of incorporation versus remaining a sole proprietorship or some other business structure.
• Attend chamber of commerce and local business development meetings to network with business owners who have been in the same place you are in now and learn from their experiences.
• If you decide to incorporate your business, you can order a Certificate of Incorporation and other necessary forms from the All-Business Web site (see Resources, below).
• Don't think that every business that wants to be successful needs to incorporate. Every business will have unique needs and tax considerations.
• Different levels of liability attach to different types of corporations. Consider your assets and decide how vulnerable to potential lawsuits you are comfortable with.