The Reasons For Small Business Incorporation
A lot of people are wary about incorporating their businesses. This is no surprise since people tend to treat their small businesses as an extension of their families. Everyday, they open their doors to customers and these small business owners put a little of their heart and soul to their business. They have absolute control over their shops or stores. Small business owners do not know the benefits that they would get out of small business incorporation. The benefits, if they care to check them out however, may amaze them.
Solve Cash Flow Problems
It is a fact that most startup businesses usually don't survive the 5-year mark. Reasons for startup business failures vary but liquidity is one of the most common of these reasons. Small businesses, if they are to grow bigger and more financially sound, need to have a steady supply of capital. Expansion means the need for extra equipment, people and other additional expenses. Survival for a small business means a steady supply of cash for operation expenses (rent, inventory, utility bills, etc) so that it can remain open day in and day out and thereby have an opportunity to sell or to serve and earn profits.
Unfortunately, small businesses usually struggle to break even. At the start, they will have capital that the owner of the business brings with him. This initial capital outlay, however, is speedily spent on business' marketing and brand recognition programs as well as on actual business operations. When the capital runs out, the business owner needs to infuse additional cash into the business -- or it dies. When small businesses reach this stage, most of them fold. Their owner no longer has spare cash to pump into the business and no loans (from friends, relatives and banks) are forthcoming to ease the financial burden. If a small business, however, is turned into a corporation before it reaches the aforementioned critical stage, it will have a much greater chance of survival. Banks and financial institutions have a much more favorable regard for corporations than for sole proprietorship or partnership companies. Furthermore, corporations have the option of issuing stocks to generate the much needed cash infusion. Pay Less Tax Owners of sole proprietorship or partnership businesses are levied income taxes that apply to individuals. Thus, a big part of small business profits have to be appropriated to pay the IRS. This can change if a small business is incorporated. Corporation taxes are usually much lower than personal income taxes. Protect Yourself When a small business folds, the loans that were taken out for the business becomes the personal responsibility of the sole proprietor or the business partners. The owners' personal assets become subject to liquidation. The same thing is not a risk for corporation. The loans of a corporation are the corporation's responsibility. Payment cannot be demanded through the liquidation of the corporation stockholders' personal assets.
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