Opening a small business can be a rewarding, yet overwhelming, experience. As a business owner, you will pursue your vision and enjoy the freedom and satisfaction that comes with being your own boss, but there are many things you need to know first.
Business leaders need a wide range of skills and knowledge; from hiring and holding onto happy, trustworthy employees and developing a customer base, to bookkeeping and maintaining accurate records. As a business owner, you are also responsible for knowing the legalities of owning a business, like, for instance, the difference between registering and incorporating your business.
So, what’s the difference between registration and incorporation? The distinction between registration and incorporation basically boils down to legalities and liabilities, on the part of the business owner. Incorporating your business protects you, as the owner, and protects your company’s name.
The purpose of registration is solely to obtain a business license to legally be able to conduct business in your particular region, which is usually required by law.
Why You Need to Register Your Small Business
In order to operate legally, most businesses need to be registered, and some require special licenses, depending on the type of services offered. An advantage to registering your business is that it enables customers to research your business, as well as find your contact information. Think of it as cheap publicity.
The cost of registering your small business varies, depending on where you live. It is, however, usually a modest price, under $100. Most business registrations expire yearly and must be renewed. This allows for the existence of an updated list of businesses that are still operating and eliminates the ones who have closed.
Registering a business is usually a simple process that requires little time and that you, as a business owner, can handle yourself by contacting the appropriate government office in your area.
Being registered may qualify your company for special credit cards that may be appropriate for your business needs. They may offer advantages like an improved credit score or rewards, however, use caution with certain business credit cards, as they may involve certain risks and not be suitable for everyone.
As the owner of a registered business, you may be approved for some types of loans. Like the business credit cards, proceed with caution, as there may be potential pitfalls with certain small business bank loans.
The Downsides of Business Registration
As the owner of a small business, you need to be aware of the limitations of having your business registered, and not incorporated.
As a small business owner, you need to be aware of any personal risk involved. Can business creditors seize your house? Can they clean out your bank account or take other personal property? Could your wages be seized? Basically, as a registered business owner, YOU are personally liable for your business’s debts.
You are, therefore, legally responsible for paying any debts owed by your business, which may put your personal assets at risk. Registration provides little to no protection in this case.
Small business taxes are filed within your individual tax return, which means that your business’ income is taxable at your own personal rate, potentially putting you in a higher tax bracket if your business is doing well financially. Your personal taxes are greatly affected by your business’ income, and you are legally responsible for paying these taxes on a yearly basis. Did the end of the fiscal year take you by surprise? It is important to ensure that you are ready when it’s tax time.
Registering your small business does not guarantee name protection for that business. You may think that just registering your business name protects it from being used by someone else, but that’s not true. Registering your small business offers absolutely no business name protection, meaning that the name is still available for anyone else to use.
Do you wish to sell your registered business? Transfer of ownership is not possible in most cases. You can sell the business’ assets, but you can not sell or transfer the existing business registration.
You must, therefore, dissolve your business, and as the previous owner, you are responsible for paying any outstanding debts before selling. The new proprietor is responsible for then taking care of the business’ new registration and accounts.
The Advantages of Incorporating Your Small Business
Despite the slightly higher start up costs involved, incorporating your small business offers many advantages that registration does not.
Incorporating your business greatly reduces, if not completely eliminates, any risk for personal liability. You and your business become separate entities upon incorporation, eliminating the possibility of personally being responsible for any financial troubles and debts your company may incur. The advantage is having peace of mind that, even though creditors may claim your business assets, your personal assets are protected from foreclosure and seizure.
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.
You, as an incorporated business owner, are considered separate from your business. Therefore, your company’s taxable income is filed in a corporate tax return. You, as the owner, are not personally responsible for reimbursing any business taxes claimed by the government. The sole responsibility lies on your business’ shoulders. This advantage provides you with peace of mind, in knowing that you are not personally responsible for paying your business’ taxes.
Do you wish to have exclusivity on your business name? You can assure that no one else will use your company’s name or logo by requesting business incorporation.
You must, however, request permission to use the desired name, in order to ensure no other businesses already exist in your region with the exact, or similar, name. This request may be refused if the name creates any confusion or is deemed inappropriate. You may also choose to trademark your business name and logo for even further protection.
Selling or transferring ownership of an incorporated business is possible, whereas it is not with a registered business. You may decide to sell shares in the business, and gain partners, or sell it in totality, relieving yourself of any further responsibility.
The procedure can be extremely complex, however, with many legality details. It is highly advisable to hire a corporate lawyer before proceeding in the sale of a portion, or the totality, of your corporation. This ensures that all of the legal details are worked out clearly and that both parties, i.e. the seller and the buyer, are aware of their individual rights. This can prevent any future problems or confusion.
Opening and running a business can be an extremely satisfying endeavor when the owner/operator is well-informed and does their research. Owning a business is not a venture to be taken lightly. As a business owner, you must make decisions for your personal well-being, as well as for the success of your business.
Deciding whether to remain solely registered, or to incorporate your business, can be difficult and confusing. Both options have their advantages and disadvantages. Here’s wishing you personal and business success.
Registration vs Incorporation: Which Is Right for Your Business? was originally published on Due on May 11, 2017 by William Lipovsky.