Incorporation is an important step in the life of a
business, but unfortunately the true value of incorporation for a business
is often not seen until the business faces a negative situation such as
a lawsuit or bankruptcy.
A primary advantage of incorporation is the limited
liability the corporate entity affords its shareholders (owners).
Typically, shareholders are not liable for the debts and obligations of
the corporation; thus, creditors will not come knocking at the door of a
shareholder to pay debts of the corporation.
In a partnership or sole proprietorship the owner's
personal assets may be used to pay debts of the business.
Other advantages -
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A corporation's life is not dependent upon its
members. A corporation possesses the feature of unlimited life. If
an owner dies or wishes to sell their interest, the corporation will
continue to exist and do business.
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Retirement funds and qualified retirement plans
(401k) may be set up more easily with a corporation.
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Ownership of a corporation is easily transferable.
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Capital can be raised more easily through the sale
of stock.
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A corporation possesses centralized management.
Corporations are not without disadvantages. The primary
disadvantage to a corporation is double taxation. Profits of a
corporation are taxed twice when the profits are distributed to
shareholders as dividends.
They are taxed first as income to the corporation, then
as income to the shareholder. All reasonable business expenses such as
salaries are deductions against corporate income and can minimize the
double tax. Further, making an S corporation election can eliminate the
double tax.
Other disadvantages -
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There is a certain level of complexity and expense
with forming a corporation.
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Corporations have extensive record keeping
requirements.
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Operating a corporation across state lines requires
the corporation to qualify to do business in the other state.
Both the Limited Liability Company (LLC) and S
corporation also provide the limited liability advantage to the
owners/shareholders of the company, without the potential disadvantage
of double taxation.
Like corporations, these two entities also have other
advantages and disadvantages. It is a good idea to learn about all three
when deciding what form your business should take.
This article is provided courtesy of Business Filings Incorporated (www.bizfilings.com).
This information should not be construed as legal advice,
or as a substitute for consulting with an attorney, CPA (or their equivalent
outside the U.S.), or other appropriate small business trusted advisor. Small
Biz Tech Talk strongly recommends that you seek proper professional guidance
before establishing any type of new business entity and simply provides this
information, and a link to Business Filings Incorporated, for your convenience
and as part of a content sharing syndication agreement.
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