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Why incorporate?

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If you’ve thought about incorporating your company (or have been advised to incorporate) there are certain advantages and disadvantages to consider first.

Advantages of incorporating:

• Corporations can provide limited protection to the owners. If you have a non-incorporated company such as a sole proprietorship or partnership, a creditor can pursue your personal assets to pay for company debts. The owners are considered the same as the company. However, an incorporated company and its owners become two separate entities, which help the owner limit the risk of losing personal assets.

• Corporations may have tax advantages. Certain business expenses can be the deductible if your company is incorporated. These tax deductions include expenses such as health insurance premiums, life insurance, or travel. It may also include savings on self-employment taxes because corporate income is not subject to Social Security, Workers Compensation and Medicare taxes. Check with your tax advisor on this.

• A corporation’s life is not dependent on its owners. A corporation has an unlimited life, meaning if an owner dies or sells his stock, the corporation will continue to exist and do business.

• Ownership in a corporation is easily transferred. Changing ownership is as easy as selling or transferring stock to another person. Corporations also offer anonymity to its owners.

• Capital can be raised more easily. Selling stock can bring in money for the corporation. Additionally, many banks may want the company to be incorporated before loaning money.

• Retirement funds are easier to establish. This may include qualified retirements plans such as a 401(k).

Disadvantages of incorporating:

• It usually costs more to set up a corporation. If you use a lawyer, fees could run between $500 to $2,000 or more.

• A corporation requires a lot more paperwork. Different states have their own legal procedures for forming and keeping a corporation in good standing. More record keeping is required to maintain it. Legal formalities, adhering to government rules and regulations are time consuming.

• A small corporation may not be able to use the tax benefits. There may not be enough earnings in your company yet to take advantage of the tax benefits a corporation offers.

Next Page: What are the different incorporated structures?

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