Business Strategies

Incorporating means forming a separate legal entity, owned by shareholders, that conducts your business. Many owners find the benefits worth the added paperwork. Here are the main advantages, followed by some trade-offs.

Limited personal liability

The most common reason to incorporate is that shareholders are generally not personally responsible for the corporation's debts and legal obligations. If the business fails or is sued, creditors can usually reach the corporation's assets, not your home or savings. This protection has limits. It does not shield you from your own negligence, from taxes you were responsible for withholding, or from debts you personally guaranteed. Courts may also disregard the protection if you mix personal and corporate funds or ignore required formalities.

Continuity

A corporation continues to exist despite changes in ownership or the death of an owner. That makes it easier to transfer shares, bring in new owners, or sell the business.

Ability to raise capital

Corporations can sell stock to raise money, and investors often prefer the clarity of a corporate structure. This can be important for businesses with growth plans.

Tax flexibility

A corporation can be taxed as a C corporation, paying its own tax on profits, or elect S corporation status, where income generally passes through to the owners' personal returns. An S election can reduce self-employment tax on part of the profits for some owners, as long as owner-employees are paid reasonable salaries. Corporations can also offer certain fringe benefits and retirement plans. Which approach saves tax depends on your profits, how you pay yourself and your plans for the money.

Credibility

Some customers, lenders and vendors view an incorporated business as more established.

Trade-offs to weigh

• Formation and annual filing fees, and ongoing recordkeeping such as minutes and resolutions.
• Possible double taxation of C corporation profits when they are distributed as dividends.
• Payroll obligations for owners who work in the business.
• Stricter rules for S corporations on who may be a shareholder and how many classes of stock are allowed.

The right answer depends on your situation. Our formation team can compare structures, and you can contact us to discuss whether incorporating fits your goals.