Is incorporating the right step for your business? Are there any benefits to you as a new business owner, sole proprietor, or partner in a partnership? Are there other entities available if incorporation does not fit your needs?
Regardless of your company's size, number of employees, or annual revenue, you may benefit from the advantages of incorporation. What are the benefits? How about tax and legal advantages? And what else? Incorporating allows for better access to capital, business longevity, and personal anonymity.
Corporations offer many tax advantages, including the ability to establish pension, profit sharing, or stock ownership plans, and develop tax management strategies for your business. And life insurance, health insurance, travel and entertainment deductions, as well as other benefits for employees, may be tax deductible to the corporation.
A corporation is a separate legal entity distinct from its owners. All finances and records are kept separate from those of the owners. In addition, corporations offer owners limited liability. The personal assets of an owner/shareholder in a corporation are generally protected in the case of a lawsuit or business failure. A shareholder's liability for corporate debts or acts is typically limited to the amount of his or her investment in the company. In addition, the filing requirements for setting up and maintaining the corporate status should preserve the distinct corporate entity and provide legal protection of the corporate name. Incorporating in the State of Delaware, even if your offices are outside the state, offers further legal and tax advantages, which is why hundreds of thousands of corporations, including a majority of the Fortune 500 companies, are registered in Delaware.
Access to Capital
Better access to capital is available to a corporation through its ability to sell its stock. Investors are more likely to invest in a corporation as opposed to a sole proprietorship or a general partnership due to the limited liability generally afforded to corporate shareholders.
A corporation is an enduring structure that does not end with current ownership, as would occur upon the death of a sole proprietor or general partner. Transfer of ownership of a corporation can be handled through stock transfer without disrupting day-to-day operations.
Owners or shareholders of corporations benefit from anonymity. If you prefer, you can maintain your privacy within a corporation entity without your name being public knowledge.
Although a number of types of corporations and business entities exist, "C" Corporations & "Sub S" Corporations are the two most widely known corporate structures.
The most common type of corporation is a general corporation, or "C" Corporation. A general corporation can have an unlimited number and types of stockholders or owners as well as issue multiple types of stock. One disadvantage of this type of structure is the double taxation - that is, tax liability would be incurred at both the corporate level and at the personal level when dividends are distributed to the owners.
Subchapter S Corporation
The Subchapter S Corporation is similar to a general corporation, but with a special tax status. A "Sub S" Corporation offers the best of both worlds - the limited liability of a corporation and the tax advantages of sole proprietorship or partnership. Because profits are passed through directly to the shareholders, a Sub S Corporation is not subject to double taxation applicable in a C Corporation structure, where the income of the corporation is taxed, as is any dividend received by the shareholders. Sub S Corporations are, however, subject to some legal restrictions: a maximum of 75 stockholders, and limited to individual stockholders only. In addition, a Sub S Corporation may issue only one type of stock.
Other Types of Legal Structures
Alternative entities, such as the limited liability company ("LLC"), or its relative, the limited liability partnership ("LLP"), which has become the successor structure for many former professional corporations are increasingly popular. The LLC and LLP allow additional flexibility to the business owner in determining ownership and management structure, and blend many of the advantages of partnerships and corporations into one entity type. For example, the LLC maintains the tax "pass-through" advantages of the "Sub S" Corporation or partnership, but allows unlimited numbers and layers of ownership similar to a "C" Corporation, and the personal liability shield to owners not available to partnerships.
You can incorporate or form your business by filing the proper articles of incorporation or formation documents with state authorities and paying any applicable fees. For information on determining which business structure may be the optimal choice for your business, you should consult your tax or legal advisor.
Updated: January 1, 2013
This article is for informational purposes only and is not intended as an offer or solicitation for the sale of any financial product or service or as a determination that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on their objectives, financial situations, and particular needs. This article is not designed or intended to provide financial, tax, legal, accounting, or other professional advice since such advice always requires consideration of individual circumstances. If professional advice is needed, the services of a professional advisor should be sought.
© 2013 Wilmington Trust Corporation.