Should I Incorporate My Business? A Guide for Service Providers

What does it mean to incorporate a business?

Incorporating a business means setting it up as a separate legal entity from yourself. Unlike with a sole proprietorship, this protects your personal assets in case your business ever closes or gets sued. 

You can incorporate your business as a limited liability company (LLC), limited liability partnership (LLP), or corporation.

Do I need to incorporate my small business?

No, you don’t have to incorporate your small business. Incorporating is optional, but it’s worth considering in certain circumstances. 

For example, it may be worth exploring if: 

• You make more than $100,000 in taxable revenue
• It would help you take advantage of more tax benefits
• You manufacture and sell your own products
• The work you do comes with a risk of injury
• You have partners or employees and don’t want to be liable for their actions
• You’ve considered looking for investors or plan to sell your business in the future

Every service business is different, and whether you choose to incorporate is based on a variety of factors. Speak to your lawyer and tax advisor to see if incorporating is the right move for you.

When should I incorporate my business?

If you think incorporation may be a good choice for your service business, it’s important to do it at the right time. 

While you don’t need to incorporate when you’re just starting out, you also shouldn’t wait until you need it to file your articles of incorporation because it can be a time-consuming process. 

Some of the best times to incorporate a business are:

1. When your income is consistent

The incorporation process is complicated and the financial benefits aren’t worth the effort until you’re earning enough to sustain your business. 

Wait until you’re making a reliable and consistent salary of $100,000 or more a year to begin the paperwork. That way, you’ll already know your business has long-term potential, making incorporating a good step towards your growth goals. 

2. When you need personal liability protection

If the services you offer come with risks to your employees, contractors, or clients, incorporating your business helps protect your personal assets from any financial or legal repercussions if something goes wrong. 

For example, let’s say you’re a plumber, and during a job, a pipe bursts, causing water damage to the customer’s home. If the customer were to sue for damages, incorporating would protect your personal assets (like your home and savings) from the lawsuit. Only your business assets would be at risk. 

Pro Tip: Any time you expand your service offerings, reevaluate the risks associated with more complex or dangerous work and consider incorporating before you make these options available to customers. 

3. When you’re ready to hire employees

If you’re almost ready to hire your first employee, incorporating your business is a good way to offer them additional benefits like group health insurance plans, retirement plans, and formalized benefits like sick leave and vacation time.

Although you can still offer benefits as a sole proprietor, they tend to be more expensive, and you have fewer options. 

Incorporating means offering prospective employees things like life insurance and profit sharing (depending on your business structure), making you a more competitive employer. 

READ MORE: What business insurance do I need?

4. Before you sign a big contract

Complex contracts and big jobs typically come with more financial risk and leave you personally liable for any mishaps. Certain clients, like large companies or government entities may even require you to be incorporated before working with you. 

If you foresee a considerable contract or client in your future, or you’re hoping to attract that kind of work, incorporating is a good way to set your business up to take them on. 

5. When you want to separate personal and business finances

Having separate personal and business finances makes accounting, taxes, and liability much more straightforward. If you want to keep your assets separate from those of your business, incorporating draws a solid line between the two. 

It also prevents your business and personal finances from getting mixed together, making it easier to track, monitor, and manage your business’s income and expenses.

READ MORE: Do I need a business bank account?

6. You want to grow a family business

With a sole proprietorship, you can’t pass your business to a loved one when you pass away or retire. Because there’s no legal separation between the business and the owner, it ceases to exist, and your family member won’t be able to inherit or buy it. 

But an incorporation can continue indefinitely, making it easier to pass on or sell when the time comes. 

7. You’re starting a business with a friend or family member

If you’re starting a business with a friend or family member, incorporating protects you from each other’s decisions. This means that if your partner makes a bad business decision or faces legal issues, your personal assets will be protected. 

For example, if your partner decides to invest in new, expensive equipment and it turns out to be a poor business decision, leading to debt, your home and personal bank accounts would be safe.

How do I incorporate my business?

Incorporating a business is a long and time-consuming process made up of many different parts. If you’re ready to begin, use these steps as a guide. 

1. Choose a business structure

First, choose whether you want to operate as an LLC, LLP, or corporation.

• An LLC is owned by one or more individuals whose personal assets are protected from any business debts. Owners can manage the business themselves or appoint someone to do it for them. Income can be taxed personally or as a corporation. 
• An LLP is owned by partners who share control of the business. Partners are protected from each other’s financial liabilities, and business profits are applied to their personal taxes. 
• A corporation is owned by shareholders and can be either an S corporation or a C corporation depending on how they would like it to be taxed. Corporations are run and managed by a board of directors and must follow strict rules when it comes to meetings and record keeping. 

Most service businesses are LLCs (owned by one person) or LLPs (owned by two or more people in a general partnership. 

2. Name your business

If you already have a business name, you can skip this step. 

But if not, it’s time to choose a name for your business. Make it unique and descriptive, and follow your state’s regulations. 

Don’t forget to include a designator, like LLC or Inc. depending on the type of business structure you choose. 

Pro Tip: Check your business name’s availability through the Secretary of State’s website where your business is located. 

3. Select a registered agent

A registered agent is someone you authorize to receive and accept legal documents on your business’s behalf. Whoever you name must have a physical address in the state you plan to incorporate in. 

Most of the time, you’ll be the registered agent for your business. However, if you plan to expand to new states, you may need to hire a third party to act as a registered agent for you. 

4. File your paperwork

Prepare the necessary documents and file them. 

For example, if you’re incorporating as an LLC, you’ll file articles of organization, whereas for a corporation, you’ll file articles of incorporation.

You can usually get copies from your Secretary of State’s office, online legal document providers like LegalZoom, or a business attorney.

To complete these documents you’ll need to know your business name, address, registered agent, and the purpose of your business. 

Once they’re ready, file them with the Secretary of State’s office where you live. 

Note: Filing your articles of organization or incorporation comes with a fee that varies by state from $50-$500, or more if you hire someone to file them for you. 

Once your incorporation has been approved, you’ll receive confirmation from the Secretary of State’s office to let you know.

Why should I incorporate my business?

Incorporating your service business can come with many benefits. Most service business owners who decide to incorporate do it because: 

1. It offers limited liability protection

Incorporating protects your personal assets from your business’s legal and financial liabilities. 

For example, if your company faces a lawsuit because you or an employee damaged a customer’s property, and your business is found to be liable, your home will be protected. 

Only assets related to your business can be used to reimburse the client or pay for damages. 

2. It comes with tax benefits

Incorporating your business can come with more tax deductions and lower tax rates. What you qualify for depends on the business structure you choose, so check with your accountant to make sure you maximize your return. 

3. It boosts professionalism

Adding LLC or Inc. to your business name makes it look more credible, helping you to build a reputation as a legitimate company and giving you a competitive edge. 

It can also help you to win bigger contracts because some clients may prefer to work with incorporated businesses. 

4. It builds your business credit score

As a sole proprietor, your business depends on your personal credit score to get loans or credit cards. Incorporating allows you to build up a credit score for your business that’s separate from your own.

It also means business debt doesn’t count against you when you apply for a mortgage, line of credit, or other type of loan.

READ MORE: 6 steps to take before you apply for a small business loan

5. It gives you access to more funding options

Banks and other lenders are more likely to offer a loan to an incorporated business rather than a sole proprietor. You can also sell shares of the business as part of an investment deal.

LEARN MORE: Jobber Grants is a $150,000 grant program built to recognize excellence in small home services businesses.

6. It preserves your brand

Incorporating your business involves registering your business name with your state government.

Because no other business will be able to use this name, you’ll be better able to protect your service business brand.

7. It clarifies ownership roles

If you start a service business with a partner, incorporating clarifies which owners have financial and operational rights in the business. 

This can be helpful when determining who can make hiring and purchasing decisions, preventing disputes and confusion in the moment.