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With apologies to William Shakespeare, “To incorporate or not to incorporate small business, that is the question.” To be sure, starting or running a small business has demands and challenges. One of those is managing the legal entity of your enterprise.

What Are the Options?

At the start-up of a small business, you may be tempted to set the question of legal structure aside, especially if you are the only employee. While being a sole proprietor is a simple way to start, know that you can change the legal structure later. Also know that there are very good options for you to consider carefully both at the beginning and during the life of your business. You can continue as a sole proprietorship or you can evaluate incorporating as an S-Corp, a C-Corp or an LLC.

Advantages and Disadvantages of Sole Proprietorship

The advantages of operating as a sole proprietorship are:

  • Low cost to incorporate.
  • Less paperwork compared to the level of financial statements that are required by corporations.
  • Taxes are simplified—you don’t file separate income taxes from your personal filing.
  • You keep all the profits.

The primary disadvantages are that you are personally responsible for any legal judgements or financial liabilities.

Advantages to Incorporating a Small Business

Consider these advantages:

  • By incorporating, your personal assets are protected from bankruptcies and lawsuits because your personal and business assets are separated.
  • Incorporation gives you more ‘street credibility.’ Having a corporate label for your business adds the strength of organization that vendors, banks and investors may want. This can prove very valuable in seeking additional funding.
  • Your organization gains more longevity with incorporation because the business exists as a separate entity, instead of being an extension of a person.
  • Tax rates are lower than those assigned to the personal income of an individual.
  • In a corporation, the owner can determine when to receive personal income, so this will provide timing advantages to potentially pay less tax.

The main disadvantages to incorporation include some increased upfront costs, more paperwork, and added tax return preparation.

Consider When to Incorporate a Small Business

While you can change financial structures from the simplicity of a sole proprietorship to a form of incorporation, there are some benefits to incorporating early on.

  • Incorporating will contribute to enhanced status and credibility for your business.
  • You will generally experience more ease in obtaining financing for your operation.
  • You receive tax advantages.
  • Incorporation enhances liability protection.

Get Expert Professional Help

Incorporating is not something to do on your own. When you seek professional assistance, contact Busch CPA, serving the Chicagoland area. Busch CPA is experienced with entrepreneurs and provides the skill, accuracy and service that you deserve. We are a full-service bookkeeping, payroll, tax, and financial advising organization, ready to help you drive business growth.