Incorporate, or not to incorporate?

September 10, 2011 at 9:16 pm | Posted in Uncategorized | Leave a comment

As a new business owner, you have to decide whether or not to turn your company into a corporation. When a business becomes incorporated, a separate and distinct legal entity is created. An incorporated business acts independently of its business owners.

Advantages of forming a corporation:

  • Asset Protection – If you operate as a sole proprietor or partnership, there is virtually unlimited personal liability for business debts or lawsuits. If you incorporate, generally your personal assets are protected.
  • Easier to Sell – a new buyer will not be personally liable for any wrongdoings on the part of the previous owners, which is why corporations are more attractive than sole proprietor or partnerships.
  • Tax Savings – because a corporation is separate legal entity, there are many transactions that you can structure between you and your corporation to save big money on taxes
  • Privacy and Confidentiality
  • Easier to Raise Money
  • Perpetuity – can endure almost forever despite what happens to the shareholders, directors, or officers
  • Increases Credibility

Disadvantages of forming a corporation:

  • Another Tax Return – you’ll have to file 2 tax returns a year, which means increased accounting fees
  • Increased Paperwork
  • No Personal Tax Credits
  • Less Tax Flexibility – As a sole proprietor, if your business experiences operating losses, you could use these to reduce other types of personal income in the year the losses occur. In a corporation, however, these losses can only be carried forward or back to reduce the corporation’s income from other years.
  • Liability May Not Be As Limited As You Think – may be undercut by personal guarantees and/or credit agreements
  • Registering A Corporation is Expensive

 

If you do decide to incorporate, there are a few different types to chose from:

C corporation

The traditional form of corporation is the C corporation. C corporations have the most flexibility in structuring ownership and benefits, and most large companies operate in this form. The biggest drawback is double taxation. First the corporation pays tax on its profits; then the profits are taxed again as they’re paid to individual shareholders as dividends.

S corporation and LLCs

These types of corporations avoid the double taxation. Both of these are called “pass-through” entities because there’s no taxation at the corporate level. Instead, profits or losses are passed through to the shareholders and reported on their individual tax returns.

S corporations have some ownership limitations. There can only be one class of stock and there can’t be more than 100 shareholders, none of whom can be foreigners. State registered LLCs have become a popular choice for many businesses. They offer more flexible ownership than S corporations and certain tax advantages.

So, should you incorporate?

You might not need to incorporate. Depending on the size and type of your business, liability may not be an issue or can be covered by insurance. Weigh out the pros and cons and goals of your business, and decide what is best for your and our company.

 

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