As a Clearbanc Investment Associate, I talk with e-commerce founders all day long. It’s the best part of my job because it helps me get inside their heads and understand why they are excited to get out of bed in the morning and what keeps them up at night.
Many new business owners struggle with the idea of whether or not to incorporate. While there are risks and advantages of pretty much any business decision, there are definite benefits of incorporating a business—especially when it comes to protecting yourself and your business.
Before I launch into the why or how, let’s start by differentiating between a sole proprietorship and a corporation.
What is the main difference between a sole proprietorship and an incorporated business?
In simple terms: A corporation is a legal entity, whereas a sole proprietorship is not.
Since you’re legally attached to your business, remaining a sole proprietor comes with many risks including lack of health insurance, personal liability, and issues raising capital, to name a few.
Once incorporated, a business becomes a distinct legal entity that is completely separate from its owners and/or shareholders.
Incorporations don’t have to be a particular size or even have been in business for any length of time. They can also be either public or private. So, basically anyone can incorporate their business (or, as they say in the UK, set up a limited company)—including YOU!
What are the benefits of incorporating a business?
In my opinion the benefits of becoming a corporation far outweigh the costs, but it’s always important to consider both before making any major business decision.
Your personal assets are protected
As the owner of a corporation, your personal assets can’t be seized if your business amasses debt. That is, unless you sign a personal guarantee (more on that later.)
Rather than pay yourself a salary out of your revenue, you can pay yourself when it makes the most sense from a tax perspective, or even with dividends which can lower your tax bill.
In addition, business tax rates can be much lower than personal tax rates with the option to defer. You also may be eligible for certain tax breaks depending on where you’re incorporated.
You have more access to capital
As an incorporation, you have an exponentially higher likelihood of acquiring funding to help you grow and scale.
Venture capitalists are much more likely to invest in an incorporated business. Keep in mind that equity financing from VCs or angel investors requires you to give up some of your shares, diluting your ownership. However, it’s one very popular way of raising large rounds of money quickly.
Another increasingly popular method of raising money that requires your business to be incorporated is via revenue-share funding from companies like Clearbanc. With revenue-share funding, you don’t have to give up any equity and can raise a large sum of money to fuel business growth. Many e-commerce companies now opt for this method of funding since they can maintain control of the business and spend the money as they see fit.
What are the drawbacks of incorporation?
There are a couple drawbacks to incorporating your business to consider.
More administrative work
Incorporating your business requires a lot more paperwork. Since you and your business are two separate entities, incorporating your business will require you to do two sets of taxes.
As an incorporation, you’re generally required to document everything, including things like meeting minutes and a share register. And if you plan on trying to raise funding you will definitely need a detailed business plan and quarterly and yearly financial reports for your board of directors.
Aside from the upfront cost of incorporating, you may have to pay additional accountant fees as well. However, the added cost varies depending on which country you are incorporating in and your personal situation.
In general, incorporating mitigates personal liability. Consider that in any case, incorporated or not, you will need to give personal guarantees for any traditional form of lending, which comes with some potential risk. A personal guarantee puts a business owner’s personal assets at stake if the business can’t meet its repayment terms.
How do I incorporate my business?
So happy you asked! It really depends on the country you want to become incorporated in. If you want to be incorporated in more than one country you’ll have to go through separate processes to do so.
Here are some easy-access links with steps to incorporate your business in:
It doesn’t take long and is typically a pretty painless process. If you’re located in the U.S. check out LegalZoom to get the job done quickly and easily.
Incorporating gets you one step closer to being Clearbanc-approved!
I hope this break down gives you the confidence to take your business to the next level and make it ‘official’ by incorporating. And in my very biased opinion, the most exciting part is that, once incorporated, you’re one giant step closer to qualifying for Clearbanc funding!
If that excites you as much as it excites me, you can apply today at www.clearbanc.com.