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The Importance of Incorporation During an Economic Downturn

If you are unemployed due to COVID-19 and are considering starting a business, or if you simply want to formalize your existing side hustle, you may be wondering if it makes sense to do so during a market downturn. While it may seem counterintuitive, incorporating a business during a period of economic uncertainty may be a smart move for several reasons. In this article, we’ve answered several common questions to help you make a more informed decision. 


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What is incorporation?

When you form an LLC or incorporate a business in a state, you file documents with the state’s Secretary of State or other business authority to create a separate, legal entity. The process varies somewhat, depending on what state you choose and what type of business you are starting, but services like Rocket Lawyer can do most of the heavy lifting for you. If you are unsure about what business entity is best for you or which state to form your company in, ask a lawyer

What are some advantages of incorporating?

There are several potential benefits of formalizing your business by incorporating it, including the following:

  • Liability protection. Structuring your business as a corporation provides you with a measure of personal liability protection, which can protect your personal assets from being reachable by your business’s creditors or through business-related legal proceedings
  • Tax advantages. Depending on the business structure you choose, incorporating may also offer tax benefits compared to operating as a sole proprietorship; you may be able to defer income taxes and take advantage of tax deductions and credits designed for small businesses
  • Credibility. Incorporating your business can lend credibility to your venture, giving your customers and suppliers more confidence when choosing to do business with you; it may also make it easier to obtain financing and attract investors’ capital

Should I consider starting a new business during an economic downturn?

Many small businesses are started during periods of economic uncertainty because entrepreneurs may be facing uncertainty with their regular employment. Unfortunately for many people, economic downturns lead to job loss. Even if you or your spouse’s job seems secure, rocky financial markets may have you questioning whether your employer will need to make cuts.

Starting your own business gives you a chance to explore something you’re passionate about and earn money while you’re doing it. Entrepreneurship is not the right move for everyone, but it can offer work/life flexibility and the opportunity to largely be in control of your own success.

What are some potential benefits of starting a business in an uncertain market?

Starting your business during uncertain market conditions means you may be able to lower your start-up costs. If your business relies on goods or services from other businesses, an economic downturn can mean you’ll be able to negotiate lower rates for your company. You might also be able to purchase the materials you need to run your business at auction or directly from a competitor who is going out of business due to the market downturn.

Another consideration is that entrepreneurs starting small businesses during rocky financial markets often also have an easier time finding business partners or well-qualified employees who are, themselves, facing the prospect of being downsized or furloughed from their jobs.

Won’t it be harder to attract customers during a financial downturn?

When the economy is unstable, consumers and business owners alike tighten their belts. If you are considering starting a business, it’s natural to wonder if this means it will be difficult to drum up business.

However, this can actually be a good thing for someone just starting their business, since your potential customers will be looking for deals and value at a time when the field of competition is becoming more narrow.

When the economy is strong, there is also less of an incentive for people to shop around to get a better price. A new business that offers competitively-priced products or services can win over new customers right from the start and keep them long after the economy recovers.

What are some examples of businesses to start during down markets?

You can start any type of business at any time, of course. But some businesses are more likely to succeed during economic instability. For example, debt collection firms, accounting service providers, employment counselors, and auto repair shops are all businesses that historically have done well during financial market upheavals.

However, don’t let that list dissuade you from starting a business if your idea doesn’t fit into one of those categories. Some of today’s most well-known companies were started during the 2008 recession, including popular platforms for vacation rentals, ride-sharing, peer-to-peer payments, and social networks for photo sharing.

Are there potential drawbacks to incorporating a business?

Starting a small business doesn’t come without costs. Depending on the nature of your business, you may need to secure office, warehouse, or retail space, purchase inventory or supplies, and hire staff, in addition to the cost of forming and filing documents and obtaining necessary licenses or permits. There are also corporate formalities that need to be observed in order to maintain the limited liability protection incorporation provides.

And, of course, starting a business involves risks. There are no guarantees that your business will be successful, and you could lose the money you put into the company if it doesn’t turn out the way you hope. That said, in many cases, incorporation can help to protect your personal assets if your business fails and your company is unable to pay its debts. If you are uncertain about incorporating your business, an experienced lawyer can help you evaluate the pros and cons.

Ask a lawyer

Only you can decide if it makes sense to start and incorporate a new business during a period of economic uncertainty. Don’t be afraid to reach out for help and ask a lawyer if you have questions about the process or need advice.

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