Why Incorporate

A corporation is a body--it is a legal person in the eyes of the law. It can bring lawsuits, can buy and sell property, enter in contract agreements, and of course be taxed. It's most notable feature is that a corporation protects its owners from personal liability for corporate debts and obligations, within certain limits.

Corporations and LLCs offer greater asset protection than sole proprietorships and general partnerships, which is a strong reason for incorporating a business. A sole proprietor or general partner has unlimited personal liability for the debts and obligations of the business. In other words, their personal assets (like their home, car, and personal savings) remain at risk in a judgement against the business.

Why Incorporate?

It is true that operating as a corporation has its share of drawbacks in certain situations. For example, as a business owner, you would be responsible for additional record keeping requirements and administrative details. More important, in some cases, operating as a corporation can create an additional tax burden. This is the last thing a business owner needs, especially in the early stages of operation.

Remember, aside from tax reasons, the most common motivation for incurring the cost of setting up a corporation is the recognition that the shareholder is not legally liable for the actions of the corporation. This is because the corporation has its own separate existence wholly apart from those who run it. However, let's examine four other reasons why the corporation proves to be an attractive vehicle for carrying on a business.

Corporations Carry On

Another advantage of incorporating is continuance. Unlike a sole proprietorship, a corporation has an unlimited lifespan; the corporation will continue to exist even if the shareholders die or leave the business, or if the ownership of the business changes.

Selling a corporation is more straightforward than attempting to sell a sole proprietorship

Raising Money Is Easier

Corporations also have more ability to raise money, which may make it easier for your business to grow and develop. While corporations can borrow and incur debt like any sole proprietorship, they can also raise money by equity financing, which involves selling shares in the corporation to angel investors or venture capitalists. Equity financing is advantageous in that equity capital generally does not have to be repaid and incurs no interest. (Of course, by issuing shares, you are reducing your percentage of ownership in the company.)

Optimizing Your Income and Taxes

If you incorporate your small business, you can determine when and how you receive income from the business, a real tax advantage. Instead of taking a salary from the business when the business receives income, being incorporated allows you to take your income at a time when you'll pay less in tax. You can also receive income from an incorporated business in the form of dividends rather than salary, which will lower your tax bill.

Potential Tax Deferral

Becoming incorporated gives you tax deferral potential if you are a higher income earner. Business tax rates are much lower than personal tax rates, so if your individual marginal tax rate is high and you don't need the funds for personal use, you can elect to leave money in the business and take it out at a later date when your personal tax rate is lower.

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