Registration vs Incorporation

Opening a small business is a rewarding, yet challenging experience.. Business owners can set their own goals and pursue them. However, while you may own the success of your hard work, you cary all the risks, too.

Choosing the form your business takes is one of your earliest and most important decisions as a business owner. Two of the more common ways used to set up companies  are incorporating or registering them. Both options offer advantages and disadvantages.

Registering Your Small Business

Registering your business  with a state, federal or international certification board offers many advantages.  First of al, it makes it much easier for potential customers to research and find you. Registration is often a cheap form of marketing. 

Registering a business is usually a simple process. You can often simply register the business yourself, online, in a matter of minutes. Registrations costs vary, but they typically are modest. However, most business registrations expire yearly and must be renewed.

Registration may entitle your business to certain perks, such as special credit cards or wholesale discounts. Furthermore, registration may help improve your  credit score as well. However,  always use caution with certain  business credit cards, as they may involve certain risks and not be suitable for everyone.

Registered businesses are seen as part of “the establishment” which may make it easier for your company to obtain bank credit. . However, like credit cards there may be potential pitfalls with carrying too much debt, so proceed with caution. 

The Downsides of Business Registration

Despite the benefits of registering your business, there are disadvantages as well

Registration does not provide any significant liability protection. If you don’t incorporate your business, you are personally responsible for its liabilities. If your company is sued, or encounter financial hardship, your personnel assets could be at risk. 

Registration also offers few tax advantages. If you are a sole proprietorship, the IRS will tax your business at your personal income tax rate. This  could potentially land you in a higher tax bracket and increase your tax liabilities.  Did tour business’s profits take you by surprise last year? If it did, it shows why your company’s structure is important when it’s tax time.

Registering your small business doesn’t protect your name or brand.  If name or brand are important with you, consult an attorney, and consider establishing copyright or trademark protections.

Most registrations aren’t transferable at point of sale. You can sell the business’ assets, but the new owner will be responsible for obtaining a new registration. 

The Advantages of Incorporating Your Small Business

While more complicated and costly, incorporating your business offers many solid advantages.

Incorporating your business reduces most of your  personal liability risk. In the yeyes of the law, your business itself becomes a separate legal entity.  This protects your personal assets from considerable financial and legal risk.

Conversely, any personal debts and/or bankruptcies incurred will not affect your business. Your personal finances and your company’s finances remain separate, allowing the corporation to continue its operations without any disturbance.

Your company, as a corporation, will be taxed separately from you. In most cases, this will shield you from higher personal tax liabilities more than a sole proprietorship would. Additionally, it also limits your personal assets’ exposure to any risks arising from your company’s tax status as well.

Incorporation, unlike registration, offers some company name protection. You must, however, request permission to use the desired name, and ensure the name isn’t already being used.

Incorporation makes selling or transferring company ownership much easier. Furthermore, there also many more options to selling an incorporated business. For example,  you can decide to sell shares in the business, add a partner, or sell the corporation outright. 

Final Thoughts

Owning a business is exciting, but challenging. As a business owner, you must make decisions for your personal well-being, and give your business a competitive advantage..

Deciding whether to register or incorporate your business can be confusing. Both options offer a mixx of advantages and disadvantages. So do your research, get some good advice, and make the right decision today. 

William Lipovsky owns the personal finance website First Quarter Finance. His most embarrassing moment was telling a Microsoft executive, "I'll just Google it."

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