Benefits of Incorporating a Business
Liability Protection
The greatest benefit to forming a corporation is for protection against legal liability. Since the corporation is a separate legal entity from its owners, a corporation which is formed and operated correctly can protect the owners from liability for the actions of the corporation, sometimes called a "corporate shield." For example, if the corporation is sued, the owners would not be liable. If the corporation can't pay its bills, the owners (unless they have pledged personal responsibility for loans) cannot be required to pay the corporation's bills. While this protection against liability is also present in a limited liability company, corporations have been around longer and this doctrine is less likely to be challenged with a corporation.
Ability to Obtain Funding
Establishing a corporation when the business is small allows you to grow by going public and finding investors, venture capital, and angels. While limited liability companies can also attract these investors, many are still uneasy about LLCs and prefer a corporate structure, which is seen as more protected from liability issues.
Corporate Structure
Some people would argue that a corporate structure is more "formal," with a board of directors to help oversee the operations of the business. The directors, the shareholders, and the employees all have defined responsibilities. This makes management easier and also makes it easier to grow, since additional layers can be added.
Drawbacks of Incorporating
Cost to Incorporate
Although there are "do it yourself" corporation packages on the market, it is probably best to obtain the services of an attorney to make sure you incorporate correctly. The cost of incorporation can be several thousands of dollars, depending on the complexity of the business and the number of states of incorporation. But the cost of not following the incorporation process exactly could be the loss of the corporate protection.
Cost to Comply with Corporate Procedures
Corporations also must adhere to the formalities of the corporate structure, with meetings and record keeping and notification procedures. Failure to comply with these requirements can mean loss of the corporate shield.
Double Tax on Profits
Owners/shareholders of corporations are subject to what is called "double taxation." The owners are taxed (through the corporation) on the profits of the corporation, and they are also taxed personally on any dividends they receive as shareholders. You might even say this is a "triple tax" because many owners are also employees, so they are taxed again on their earnings as an employee. The salaries are tax-deductible to the corporation, reducing its tax liability, but they still must be paid by the employees. This "double tax" issue is the reason many small corporations consider electing Subchapter S status.
In short, if you want the ultimate in protection against liabilities, and you plan for your business to have substantial growth and diversity, you may want to incorporate, even though the time and costs re high. If you are starting a small home business with no employees and little chance of expanding, you probably don't need to incorporate. Remember, I am not an attorney or tax adviser and I'm not giving you legal advice. Check with your attorney before making any decisions relating to whether or not you should incorporate your business.
