The advantages of changing from a sole proprietorship to a corporation are the benefits that come from creating a separate legal entity for your business. While most businesses start out as sole proprietorships, many individuals find a corporate structure is more appropriate as the enterprise grows. The primary advantage of changing is that a corporation is a separate legal entity from its owners. This means that the owners of a corporation are not personally liable for the debts and liabilities of the corporation. Another advantage of incorporating is that a corporation can raise capital by selling shares of stock. Finally, corporations have a perpetual existence, meaning they exist indefinitely even if their owners die or leave the business.
Compared to sole proprietorships, corporations get easier access to financing. Sole proprietorships have a single owner, unable to accommodate investors. Corporations can attract investors due to stock structure, transferability, and limited liability.
Steps to Transition
Register Your New Corporation
The first step once you have decided to incorporate is to register your new corporation. There are services that can help or you can do it yourself with guidance.
Liability Protection
A sole proprietor is accountable for the debts and liabilities generated. A corporation protects personal assets using a liability shield. Only assets owned by the business are at risk; personal assets generally cannot be claimed.
Perpetual Existence
The corporate business structure keeps any business running when original owners resign or pass away. This enables owners to transfer shares and pass ownership to offspring.
S Corporation Considerations
An S corporation has advantages over a sole proprietorship including tax savings and limited liability protection. To convert a sole proprietorship to an S corporation, you need to understand key differences and file proper paperwork.
When transitioning entities, complete all steps fully or risk exposure. Form a separate legal entity, transfer assets completely, close prior entity completely. Double check to ensure transition is fully complete.