Turning Your Small Business Into a Corporation

But Shane argues that entrepreneurs who fail to incorporate are making a huge mistake. Corporations have a much higher rate of success than sole proprietorships, he writes, even when it comes to small businesses. He says that the academic literature shows that incorporated small businesses outperform unincorporated in terms of profitability, employment growth, sales growth, and other measures.Yet could it be that businesses that bother to incorporate just have their act together already and are destined for greater success? Shane admits that such a self-selection phenomenon is possible. On the other hand, he counters, "it could be that there are many things that you can't do well unless you're incorporated."

The biggest positive effect of incorporation is on legal liability. If you get sued as a sole proprietor, your personal assets are on the line. But a corporation is liable only for the assets put into the corporation. This protection can be a boon for a business's growth. "In some cases it's harder to grow large because the risk to you is too great," Shane says.

Of course, some small-business owners may think, for instance, that their little home business, maybe run out of a basement office, isn't significant enough to raise such worries. Indeed, Shane admits that getting incorporated may not make sense for "tiny little businesses" because "if you have very little money to put into the business, you don't have a lot of risk, so it may not be worth the complexity."

But Deborah Sweeney, incorporation expert for the software company Intuit, argues that "even the smallest eBay business has a risk of being sued." If you're shipping a product around the country or world, for instance, and it gets lost, you can run into legal problems.