The decision on whether or not to incorporate your business is a major decision. Incorporation is difficult and often times impossible to convert back into a sole proprietorship, leaving you to do extensive research before the decision is made.
Difference between a Sole Proprietorship (Unincorporated) and a Corporation
Understanding the difference between a sole proprietorship and a corporation is critical to make the correct decision for you and your business. A sole proprietorship is a one-man gig, meaning you are the only owner. On the other hand, a corporation can have as many owners as they want. This can be beneficial if you need investors that want a share of the business.
Tax Liability
Let’s take a look at the tax liability differences. A sole proprietorship will report any income and loss on the individual tax return. They will then pay corresponding taxes on that income. On the other hand, a corporation gets taxed at the corporation level. The corporation will then pay taxes on that income, leaving no tax liability to you on the individual level. Having a corporation also allows you to defer taxes through effective tax planning methods, like deferring payments or speeding up receivable collection.
Legal Liability
Just like sole proprietorships and corporations have differences in tax liability, they also have different legal liability. Since you are the only owner in a sole proprietorship, you will be liable for any lawsuits against you. Claimants have the opportunity to come after your business and personal assets. On the other hand, corporation status acts as a shield from claims and your personal liability. If you are being sued, they claimants can only come after your business assets. This is a major reason for companies deciding to incorporate.
Protect Your Brand
Your brand is your business, so be sure to protect it properly. By incorporating you are protecting your brand through trademarking it. If people want to use your logo or slogan, they will need permission from you. However, sole proprietorships have limited protection for their brand since often times you don’t need to setup a formal business name and trademark. Depending on your business type, it might be a good idea to incorporate.
Growth and Expansion
Sole proprietorships are usually unable to raise capital at the same level as a corporation. Corporations are easily able to accumulate funds through issuing of stock, crowd funding and private investors. On the contrary, sole proprietorships don’t have that ability. They can’t issue stock since they are the sole owner. This can create issues if your business needs a great deal of capital.
Easier to Sell
Just like it’s easier to raise capital for corporations, it is also easier to sell your business. Sole proprietorships cannot transfer ownerships. Instead, they would have to shut down their business and the new individual would have to open a new company in their name. On the other hand, if you have an ownership interest in a corporation, you can easily sell that interest to someone else.
