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Benefits of Forming a Corporation
You don’t have to be a large business
to benefit from forming a corporation. In fact, quite the
reverse is true. And contrary to popular belief, forming a
corporation can be more beneficial to your business than opting
for sole proprietorship, as it’s cost-effective and
will save you time. Here are some of the advantages of forming
a corporation:
- Lowered debt risk. Let’s say you’re
running a sole proprietorship or general partnership
and you accumulate debts. Your personal property is
now at risk because you’re personally liable
for those business debts. However, in the case of
a corporation, your assets are much safer, because
the corporation provides limited liability protection
to you, its owners (called shareholders). This means
your personal responsibility for the debt decreases
tremendously and prevents creditors from seizing your
personal assets (your house and other property) to
pay the business debts.
- Tax savings. Your personal accountant or tax advisor
may be able to give you full details about the tax
benefits of which corporations may avail themselves.
For example, corporate income is not liable for Workers’
compensation or Medicare taxes, and it’s also
exempted from Social Security and life insurance.
Corporations can even benefit from deductions on health
insurance premiums paid by the owners/shareholders.
- Extensive duration. Corporations generally have
a longer life than do the sole entrepreneurships.
Even if the main shareholder(s) decides to sell the
business interest, the corporation still continues
to do business. Even after the shareholder(s) death,
its life is independent of the shareholder(s). You
could say it almost has a life of its own.
- Greater credibility. This is especially the case
if you’re trying to establish a new business
venture, and are attempting to build credibility with
potential staff, clients, suppliers and partners.
Corporations can more easily achieve this than can
sole proprietorships and less formal partnerships
and companies.
- Retirement plans. In corporations, retirement plans
are more easily activated than they are in general
partnerships. Retirement funds can also be made more
easily available.
- Creating funds for business. Many banks nowadays
ask loan seekers whether they’re an incorporated
business. There may be difficulties ahead for you
in securing your capital if you’re not a corporation.
Again, it adds credibility and is likely to more favorably
impress bank managers, as well as clients.
- Transfer of ownership. Except for an S corporation
ownership, provision is there for an easy and trouble
free transfer of ownership for a corporate business.
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These advantages notwithstanding, it’s
important to also be aware of some potential disadvantages:
- Taxation. If you haven’t selected S corporation
tax status with the Internal Revenue Service, your
C corporation business is liable to double taxation
of corporate profits! This is collected after the
income is distributed as dividends among the shareholders/owners.
- Some strict formalities. Corporations are subjected
to some strict formalities that are legally binding.
Annual or quarterly record keeping, for example, and
regular meetings of the directors and shareholders.
These are all mandatory. Careful monitoring, and strict
following, of bylaws and non-negotiable rules for
issuing stock shares to the owners, is a must. Sole
proprietorships and general partnerships are exempted
from these formalities, and they can make their own
rules.
- Expenditure. In some areas, an ongoing fee is imposed
on corporations for their annual reports, or franchise
tax. They have to file mandatory state fees for their
articles of incorporation. Sole proprietors, however,
are not required to carry out this procedure.
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As always, the best policy is to conduct
some thorough research into the advantages of all options.
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