5 Reasons Why Incorporating Your Trading Business Is a Good Idea

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99.9% of all businesses across the US are small businesses. These small business owners are usually pressed for time and have so many important decisions they need to make. One of these important decisions is the choice of business structure. This should not be taken lightly as the business structure you choose can be the difference between losing all your personal assets or saving them.

Incorporation simply means registering your business as a corporation. The benefits of incorporating your trading business include protection of personal assets in case of lawsuits or bankruptcy, tax deductions, and easy transfer in case of succession to children or outright sale.

Let’s take a look at the types of business structure and specifically the benefits of choosing the corporation business structure.

Choosing the proper business structure

Source: corporate finance institute

Before you make the decision to incorporate your trading business, you need to decide on the most appropriate business structure. The type of company structure you register will influence so many factors like the tax you pay, your ability to raise external funds, legal documentation you need to do, and your personal liability. Let’s take a look at some common business structure types you can choose from.

1. Sole proprietorship

It is easy to form a sole proprietorship business and you can get a trade name with this business structure. This is ideal for business owners that are just starting out and wish to test their business idea before investing in registering other advanced business structures. You should note that sole proprietors are liable for the debts and all legal issues related to the business. This is because the business is not a separate business entity from the owner.

2. Partnership

Partnerships involve an agreement between two or more people that are joint owners of a business. This is the simplest structure for joint ownership and can be the starting point to test out a business idea before moving on to register a more formal business. The two common types of partnerships are limited partnerships (LP) and limited liability partnerships (LLP).

In the LP, all partners except only one general partner have limited liability. The general partner has unlimited liability and is legally entitled to pay self-employment taxes. While the LLP gives all partners limited liability and each partner is not liable to pay partnership debts nor bear consequences for other partners’ actions.

3. Limited Liability Company

With a Limited Liability Company (LLC) you can gain the advantages of both the partnership and corporation business structures. In most cases, the LLC will protect you from losing your personal assets in case the business faces debts or legal cases. LLC is suitable for high-risk businesses like trading.

It is best when partners have significant personal assets they wouldn’t like to be affected in case the business goes bankrupt. It is also a good choice when you want to pay lower taxes compared to those charged for a corporation’s business structure.

4. Corporation

A Corporation’s business structure offers the strongest protection for the personal liability of owners. It is not always the first choice of business owners who are just starting out mostly because it costs a lot more to register a corporation compared to other business structures. When you have a corporation business structure you will need to have very detailed records of all expenses and income.

A corporation is a separate business entity that can be taxed and can be sued as an entity. When the company makes a profit, it must pay its tax as a legal entity. In addition, shareholders are to pay income tax when they receive company dividends.

As a separate legal entity, corporations can easily raise funds by selling stocks and this is very attractive to investors.

You should choose a corporation business structure if you need to raise capital, wish to go public with the business, or sell out the business in the future.

5. Corporative

The last business structure we will be discussing is the cooperative structure. All profits of the business are usually distributed among cooperative members based on the shares they own with the business. The cooperative is usually owned and directed by those benefiting from the business services. For instance, a group of forex business owners can come together to form a corporation wherein any member can become a key decision-maker by buying cooperative shares.

5 key benefits of incorporating your trading business

Source: Entelyglobal

The corporation business structure is the best company type for long time growth with lots of amazing benefits. Some of the benefits of incorporating your trading business are the ability to protect your personal assets from company-related lawsuits and tax deductions. It is okay to start with a sole proprietorship or partnership business structure due to cost or if your trading business is still in the testing phase. As a trading business, you can use an automated trading system to build, test and execute your trading strategies.

The benefits of the corporation’s business structures outweigh the disadvantage. It is important to incorporate your trading business as soon as you can in order to take advantage of the following benefits.

1. Tax advantage

Trading business is mainly a for-profit business venture that aims to gain a return on invested capital. As a result, business owners are always seeking ways to reduce costs and legally avoid huge tax payments. One very effective way to cut down tax payments is to register your trading business as a corporation.

Though the registration process might be hectic and cost a sizable amount of money, the huge tax cut-off makes the whole process worth it. With an incorporated business, you are free to deduct all start-up expenses, operational costs, and employee benefits. Before claiming deductions, it is best to consult a business lawyer in order to avoid unnecessary mistakes.

2. Funding opportunities

Incorporation adds additional credibility to your business and opens up doors for funding opportunities. Venture capitalists and real-money investors are very unlikely to take your business seriously if all you have is a sole proprietorship or partnership business structure. The corporation’s business structure shows intense commitment to long-term business growth which is a critical feature looked for by investors.

An investor is always thinking about the viability of a business and the probability of getting a return on their investment. Simply incorporating your business can put the hearts of investors at rest and open doors for massive funding opportunities.

3. Limited liability protection

The sad truth is that sometimes businesses fail. In fact, there is a high percentage that your startup business will fail. In the event of business bankruptcy, incorporation becomes a thick barrier between your business and personal assets. if you run an incorporated business, your house, car, and other personal assets are not at stake if your business fails.

Also, in the case of lawsuits, you are not liable to use your personal assets to settle damage charges that anyone files against your business. Protection of personal assets is available because your business is a separate legal entity and the owners are under limited liability protection.

4. Succession planning and continuity

With incorporation, your business is a separate legal entity that is free to operate forever. Even if a shareholder leaves or dies, the business continues to exist. This is very important for long-term growth as the survival of the business is not tied to the presence of any single individual.

It is possible for the initial owners of the business to all die and new shareholders can take over the business without the need for re-registration of the business. That is why we have companies that like Coca-Cola and Procter and Gamble that have been in existence for over a hundred years.

5. Easy to sell or transfer

A sole proprietorship can not be easily transferred to your children or external buyers. Let’s say in the future you wish to sell your business after you have built it to a successful level that is then attractive to buyers. You can easily do so if you have an incorporated business. Likewise, you can will out your incorporated business to your children or anyone you wish. It is easier to transfer business ownership when you have a corporate business structure.

Source: Quicko

Final thoughts: Why it is necessary to incorporate your trading business

You are free to choose any business structure you want for your company but a corporation is the best choice for long-term growth. In fact, apart from long-term growth, you get powerful immediate benefits like protection of personal assets in case of bankruptcy or lawsuits. This limited liability protection is enough reason to incorporate your trading business.

No one wishes to fail in business or receive damages lawsuits from clients but the reality is that they sometimes happen. You need to bulletproof your personal assets from loss by incorporating your trading business. Other key benefits of incorporating your business are tax deductions, succession planning, and ease of ownership transfer in the future.

It is okay to test out your business idea as a sole proprietorship business but it is more advisable to incorporate your business as soon as you can.

Author’s Bio: Mercy Adewumi

Mercy is a professional B2B and SaaS writer that specializes in crafting advanced-level content that is engaging, fun, and appeals to top-level executives. She is a resilient, self-motivated, and result-driven person with the proven ability to create high-quality content related to Business, Saas Tech, and the Financial Markets. She believes that SEO is the best digital marketing medium ideal for long-term growth. When she is not writing, she is creating strategies for business growth.