You don’t have to be a large business to benefit from forming a corporation. Quite the reverse is true. And contrary to popular belief, forming a corporation can be more beneficial to your business than opting for a 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 a corporation's case, 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 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, corporations can 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 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 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. For corporations, retirement plans are more easily available than they are in general partnerships or sole proprietors.
- Availability of funds. Many banks 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.
- 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. The tax is collected on the remainder of the profit after the income is distributed as dividends to the shareholders/owners.
- Strict formalities. Corporations are subject to some strict formalities. For example, corporations are required to keep annual or quarterly records and have regular meetings with the directors and shareholders. Careful monitoring, and strict following, of bylaws and non-negotiable rules for issuing stock shares to the owners, is required. Sole proprietorships and general partnerships are exempted from these formalities.
- Higher expenditures. Ongoing fees are imposed on corporations for their annual reports or franchise tax. They have to file mandatory state tax returns and annual reports. Sole proprietors, however, are not required to file these types of forms.
As always, the best policy is to conduct some thorough research into the advantages of all options.