If you’re one of the many people who started a home-based business in the middle of quarantine, you probably registered your company as a sole proprietorship. This simple business structure is ideal for new entrepreneurs who just started to sell a product without creating a business plan. Or, for those who’d instead not work on the massive paperwork involved in incorporating.
In most cases, entrepreneurs will not incorporate their businesses until they’ve reached a certain level of success. That is the right decision because the bigger a business grows, the higher its risks become.
But several entrepreneurs remain as a sole proprietor despite their business’s increasing scale. In such a case, it is strongly advised to change business structures, because the entrepreneur’s assets can be at stake when a serious issue in the business arises.
When to Turn Your Small Business into a Corporation
If your revenue and profit go to your personal savings account, it’s easy to get confused and disorganize your finances. The solution, other than learning how to open a checking account solely for your business, is to change your structure.
Why? Because in a sole proprietorship, personal assets and the business’s assets aren’t separated. You and your business are considered a single entity. That means the profits and losses of the business are yours, too.
Being a sole proprietor also puts you at a disadvantage when a customer complains or files a lawsuit. For instance, if you’re selling a food product and a customer contracts food poisoning because of it, they may sue, making you personally liable for their condition.
Aside from considering those risks, it’s also advisable to incorporate your business when you want to simplify your tax filing. As a corporation, your business will be paying corporate taxes, as it will be considered a separate entity from you.
Another sign that it’s time to change your structure is when you start hiring employees or seeking outside investment. Undergoing these significant changes means that your small business has already outgrown being a sole proprietorship.
Advantages of Being a Corporation
One of the greatest perks of incorporating is the legal protection it provides for your business. The personal assets will be protected in the event of a lawsuit or bankruptcy. It also reduces your taxes and increases your credibility. Customers tend to perceive corporations as a more professional structure, thereby trusting them more.
And if you plan to pass on your business to your heirs, incorporating will allow a smoother succession, making a business’s life perpetual without the need for heirs to secure a new business license.
How to Change Structures
For small business owners, changing to an S-corp or one-person corporation (OPC) is ideal. S-corps aren’t usually required to pay corporate taxes, but instead, only pay them on dividend earnings. Meanwhile, an OPC, which is a type of business structure in the Philippines, allows a single entrepreneur to own a corporation without a board of directors and four other incorporators.
The first step in changing your business structure is consulting your tax advisor. They will let you know the requirements you’ll need. You should research your state’s requirements on your own as well because some areas require additional documentation outside of what the state asks.
With your accountant’s help, determine the financial aspects of incorporating, such as how you’ll file taxes, whether you’ll need insurances if you require your vendors additional liability insurance, and so on.
By incorporating your business at the right time, its longevity will be ensured, which is essential, considering the crisis and uncertainty we’re currently facing.