The Pros and Cons of Incorporating

incorporateIncorporating your business transforms it into a legal entity separate from you, capable of starting a lawsuit, buying property or even committing crime. Of course, the decision to incorporate depends on your business and your needs and it isn’t right for every business.

Business owners who do decide to incorporate gain many potential benefits, including lability protection, a range of tax benefits and an easier time getting financing and investors. To help you decide if incorporating is in your best interest, here’s an easy comparison of the pros and cons.

Advantages Gained from Incorporating

  1. Limited liability protection. This is probably the biggest reason many small businesses end up incorporating, whether they incorporate in Delaware or the state in which they operate. As long as you operate your company according to the laws and regulations set in place, your corporation becomes a legal entity of its own with its own separate debts and liabilities. You can’t be held personally responsible for the corporation’s debts if it becomes unable to pay debts or liabilities, even after a lawsuit. With a partnership or sole proprietorship, on the other hand, personal assets may be seized to pay off the debts from the business.
  2. A range of tax benefits. Corporations are taxed at a significantly lower rate than individuals, although it’s important to remember there are a few types of companies, each with different tax structures. With a C corporation, for example, only the first $50,000 of the company’s taxable income is taxed at 15%, compared to an individual who may be taxed up to 27%. Salaries, employee bonuses, education benefits, health insurance benefits, dependent care assistance and more are also fully deductible, whereas many things are only partially deductible by a partnership or sole proprietor.
  3. Easier access to investment capital. Incorporation usually gives you more flexibility in terms of raising capital. You won’t need to actually borrow money anymore and pay interest; instead, you can choose to sell stock or equity interests. Investors are much more interested in investing after you’ve incorporated.
  4. Your business lives on. For some, the idea that their company can live on after they pass is a strong incentive to incorporate. With a partnership or a proprietorship, the company disappears when the owner dies. Corporations, on the other hand, will keep going on.

Downsides of Incorporating

Of course, everything has it’s disadvantages, including incorporating your business. There are three primary things you should consider before you make your decision.

  1. Complex rules and laws. Forming a corporation can be challenging, although the real work is the maintenance. Corporations must remain in good standing by filing the necessary paperwork, keeping detailed records and through proper accounting. Failure to follow the established rules and you can lose your liability protection or incur hefty fees.
  2. Possible double taxation. Depending on how you incorporate, you may face double taxation when the company’s profits are first taxed as income to the company and then as income to the shareholders once it’s distributed in the form of dividends. You can avoid this by forming an LLC or electing the S corporation status — provided you meet qualifications.
  3. Advice is usually necessary. During the incorporation process, you may choose to hire a corporate service company like USA Corporate Services to help you choose the right entity based on your business type and then file the necessary paperwork. Once your company is incorporated, you’ll also want to get professional advice and guidance to make sure your business stays complaint.

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