As a separate legal entity, a corporation is responsible for its own debts. That means creditors of a corporation generally can seek payment only from the assets of the corporation -- and not from the personal assets of shareholders, directors and officers. In effect, that means business owners can conduct business without risking their homes, cars, savings, or other personal property. Owners of a sole proprietorship or partnership, on the other hand, face unlimited liability for both business and personal assets.
Five Advantages to Incorporating Your Business
Owning a small business can be a risky venture. One way to limit your personal liability is by incorporating your business, reports the California Society of CPAs (www.calcpa.org). While incorporation requires more paperwork and expense than a sole proprietorship or a partnership, it offers important legal and tax advantages.
1. Protect Your Personal Assets
Incorporating your business is one of the best ways you can protect your personal assets. A corporation can own property, carry on business, incur liabilities, and sue or be sued.
2. Have Easier Access to Capital
Raising capital is generally easier for a corporation, since a corporation can issue shares of stock. This may make it easier for your business to grow and develop. If you’re in the market for a bank loan, that’s another reason to incorporate. In most cases, banks would rather lend money to corporations than to unincorporated business ventures. Corporations generally have access to more alternative sources of capital through which they can pay off their debts.
3. Enhance Your Business’ Credibility
The benefits of incorporating go beyond finances. Suppliers, customers and business associates often perceive corporations as being more stable than unincorporated businesses. In a sense, having “Inc.” or “Corp.” after your business name conveys permanence, credibility, and stability, and communicates your commitment to the ongoing success of your business venture.
4. Perpetual Existence
Corporations are the most enduring legal business structure. A corporation can continue indefinitely, regardless of what happens to its individual directors, officers, managers, or shareholders. This means that by incorporating your business, you may be able to avoid the legal entanglements that could result with other business structures.
5. Gain Anonymity
A corporation can offer anonymity to its owners. If you want to open a small business and don’t want your involvement to be public knowledge, your best choice may be to incorporate.
6. Other Considerations
As a separate legal entity, a corporation is taxed on its profits. Those taxable profits can be reduced by qualified business expenses, including operating expenses, marketing and advertising expenses, travel and entertainment expenses, and other costs of making a profit. An incorporated business may also deduct employee salaries, health benefits, and contributions to qualified pensions and retirement plans for employees. However, the taxation of corporations is complicated; different corporate structures have different tax advantages and disadvantages.
While incorporation comes with important benefits, it may not be the best form for all businesses. A CPA can help you to assess the tax and other implications of incorporating your business.
Produced in cooperation with the AICPA
©2006The American Institute of Certified Public Accountants