Forming a Corporation can be quite beneficial whether you are starting a new business or have been operating as a sole proprietorship or general partnership for a while now.
Many business owners have the perception that opening a Corporation can be both costly and time-consuming, however, it is not the case. Putting the gains and losses in a balance, you could be surprised at how the advantages can outweigh any downsides.
What are the advantages?
Protect your assets with Limited Liability: Corporation owners enjoy limited liability protection, and are typically not personally responsible for business debts; so creditors cannot pursue owners’ personal assets, such as a house or car, to pay business debts.
Tax breaks: Corporations gain tax advantages such as the deductibility of health insurance premiums paid on behalf of an owner-employee, savings on self-employment taxes, and life insurance.
Unlimited Life: A Corporation’s life is not dependent upon its owners; this means that if an owner dies or wishes to sell his or her interest, the corporation will continue to exist and do business.
Business growth: forming a Corporation may help a new business establish credibility with all parties and may help you get new potential customers, vendors and partners.
Transferability of Ownership: Easy transfer and faster funds. Corporation ownership can be typically easily transferable (with some restrictions on S corporation ownership). Capital can be raised more easily through the sale of stock. Another advantage is that many banks prefer handling loans with incorporated borrowers.
Retirement: funds and qualified plans, like a 401(k), can be easier to establish.
Potential disadvantages of forming a Corporation:
Double taxation: C Corporations are subject to double taxation of corporate profits when income is distributed as dividends. The double tax is created when tax is first paid at the corporate level. This can be avoided by electing S corporation tax status with the IRS.
Formation and Ongoing Expenses: You must file articles of incorporation with the state, plus applicable fees. Many states impose ongoing fees on corporations, such as annual reports and/or franchise tax fees. These requirements can be more expensive than for a sole proprietorship or general partnership since these forms of business are not bound by the same taxes.
Corporate formalities: Corporations are required to follow both initial and annual record-keeping tasks, such as holding and properly documenting initial and annual meetings of directors and shareholders, adopting and maintaining bylaws and issuing shares of stock to the owners, which sole proprietorships, general partnerships and limited liability companies (LLCs) avoid.
