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.
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 proprietorship.
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.
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.
As always, the best policy is to conduct some thorough research into the advantages of all options.