Unincorporated Company: Everything You Need to Know
Unincorporated company describes a business that has not been legally registered as a business with the relevant state authorities.3 min read
Unincorporated company describes a business that has not been legally registered as a business with the relevant state authorities. Unlike an incorporated business, which has an independent legal existence, unincorporated companies are not distinct from their owners.
Incorporated Versus Unincorporated
A key difference between a registered business and an unincorporated business is that owners of an incorporated company enjoy liability protection. This means, for example, that your personal assets cannot be seized to cover a debt the company has incurred. Creditors have no power to target your assets to collect a payment because the company is responsible for its own financial affairs. On the other hand, if your unincorporated business defaults on a debt, you'll be personally liable to cover it.
Similarly, if your unincorporated business is involved in a lawsuit, you can be held personally responsible for the costs. In the case of a registered business, only the company's assets can be used when settling a suit.
Unincorporated businesses are typically sole proprietorships or partnerships. By contrast, an incorporated business takes considerable time to run and is well-suited to larger businesses, including those with a significant number of employees.
Costs of Both Business Types
The first step in establishing an incorporated business is to file articles of incorporation, which requires the payment of a fee. The amount you'll have to pay varies from state to state. Additional costs you may incur as a registered business owner include:
- Annual fees to regulatory boards
- Legal fees for assistance in maintaining the corporation
- Ongoing costs for financial reports, accounting, and federal and local tax filings
- Expenses to hold annual shareholder meetings
Organizing a shareholder's meeting could turn out to be more expensive than you think, particularly because you'll need to mail out invites and other relevant documents. These documents may include financial records and reports on the activities of the business.
An unincorporated business owner can usually avoid such expenses. Common costs may include:
- Occasional legal assistance
- Professional tax filing assistance
When filing taxes, owners of an unincorporated business must report any profits or losses on their own tax returns because the business has no independent existence. By contrast, an incorporated company pays taxes on whatever it earns, while individuals who receive payments from the company must also pay personal taxes. This means that a registered business owner can be taxed twice.
However, corporations pay a lower rate of tax than individuals. As an owner of an incorporated business, you also have the option of deferring taxes to a later date, or apply for tax deductions. By ensuring you claim deductions for business expenses, you can cut your tax bill substantially.
If you own an unincorporated business, you have the option of claiming personal tax credits. Unlike owners of registered businesses, you can also use any losses incurred by your company to decrease your personal income tax bill.
When an owner of a registered business sells the company to an investor, the company continues to exist as before. By contrast, you need to draw up new deeds to sell an unincorporated business to a new owner. Transferring your interest in the business to a third party is extremely complicated due to the fact that the business is considered to be an extension of you personally.
A further advantage for owners of registered companies is that they can issue stock to raise capital. You should keep in mind, however, that doing this will lead to a decline in the share of the company you own. On the plus side, banks and other financial organizations see the ability of registered businesses to issue stock as a positive thing and are usually more likely to lend money to you than to an unincorporated business. This is because they consider the issuing of stock as a way to cover debts or increase cash flow.
Additionally, you need to report business activities to shareholders and the government if you own a registered business. Conversely, you can generally keep your activities private if you're running an unincorporated business. Since you don't need to answer to shareholders, you have more flexibility to decide what to do with profits in an unincorporated company.
If you need help with your unincorporated company, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.