Should I Incorporate My Business?
In recent years, there has been a tremendous increase in the number of home-based businesses and independent contractors
. Most small businesses start out as sole proprietorships, or as partnerships, depending on the number of owners. These business structures are relatively simple and inexpensive to establish and operate as extensions of their proprietors, with the owners reporting profits and losses on their personal tax returns.
Incorporation, on the other hand, refers to the process by which a business receives government authorization to function autonomously as a separate and distinct legal entity from its owners. For small enterprises, it results in the dual benefits of limited personal liability, as well as significant tax subsidies originally intended for much larger companies.
Advantages Of Incorporating A Business
One of the main advantages of incorporating is that, in most cases, it limits your personal liability. Once a business becomes incorporated, an individual shareholder's liability is limited to the amount he or she has invested in the company, and they can no longer be held responsible for the debts of the corporation unless a personal guarantee was specifically given.
A corporation is an independent entity and, thus, tax returns are filed separate from those of its owners. These are calculated using corporate tax rates, which are usually lower than the personal income tax rate. As such, most businesses experience significant reductions in tax payments once they incorporate. Additionally, incorporating your business has the added advantage of raising your credit rating since corporations acquire their owncredit rating.
It also becomes easier to obtain funding once you incorporate your business. Most corporations raise money through the sale of a percentage share of the stock to interested investors. These stock shares make it easier to transfer ownership of the corporation either in whole, or in part, because the corporation exists as a separate legal entity.
As such, the transfer of ownership does not impact the existence of a corporation or of its various assets. With sole proprietorships or partnerships, such a process is generally costly and time-consuming since it requires the re-titling of property and accounts. Moreover, a corporation finds it easier to survive the death of a founding partner, unlike sole proprietorships.
Disadvantages Of Incorporation
Incorporation, while extremely advantageous, for fast-growing businesses is an expensive proposition. There are four types of fees associated with incorporating: the fee to file the Articles of Incorporation with the Secretary of State, a first-year franchise tax prepayment, fees for various governmental filings, and attorneys' fees.
The various statutory regulations and requirements associated with incorporation may also be daunting to first-time business owners. A massive amount of paperwork, including records of corporate actions, such as meetings of shareholders and the board of directors, reports and tax returns, must be compiled and filed. You will also need to maintain separate accounts and records for your business and personal finances.
In conclusion, incorporating your business can be a complicated, yet rewarding process. Once incorporated, your business becomes a separate legal entity capable of paying taxes, entering into contracts, and maintaining an independent commercial identity.
Should I Incorporate My Business?
By: Jane M Dawson
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