Forming a corporation is one of the business structures that you might be considering, and while many people think that incorporation is only for large companies it can also be good choice for smaller businesses. There are some real advantages to incorporating, which may make it worth the extra expense and effort involved.
What are the advantages of incorporating?
Asset Protection One of the first advantages to consider is that of asset protection. In general, creditors are limited to seeking payment from the corporation itself, and not shareholders or directors. This is important in terms of estate planning, since your personal assets would not be at risk if you have a corporate structure, and only corporate assets are exposed to liability.
An Entity That is Viable in Perpetuity A corporation is its own entity, and does not rely on specific shareholder or officers to continue its existence. This is distinct from a partnership or sole proprietorship, which will end if the owner(s) decide to exit the business at some point.
Tax Advantages There are two types of corporate entities, the ‘S’ corp and the ‘C’ corp. You have to select one of these and it affects how taxes are calculated on income. In the S corp income is ‘passed through’ to shareholders and taxed at normal individual rates, and the C corp receives the 21% corporate tax rate, which may be quite a bit lower than your personal rate.
Business Credibility Having a corporation may give you more credibility with potential customers, suppliers, lenders and employees more than another type of business structure.
What are the disadvantages of incorporating?
Corporate Formalities With a corporation there are formalities required, and certain officers have to manage the process of registration, filing articles, following bylaws and keeping regular meeting minutes. These steps are what give the corporation its status as a separate entity, and they have to be done correctly and at proper intervals.
Expenses There may be extra expense with setting up a corporation, including ongoing legal and accounting advice.
Is Incorporation right for my business?
The answer to that question depends on the type of business, number of owners involved and other financial considerations. The only way to know for sure is to speak with an attorney who is well versed in structuring businesses, and can discuss all of the options based on your own situation.
If you have questions about whether incorporation is right for your business, please contact the attorneys at Shoup Legal.