Incorporation can be a very beneficial business move for both entrepreneurs looking to start a new company and those looking to reorganize their pre-existing sole proprietorship or general partnership. Adopting a formal corporate structure (either C corp or S corp) takes much more administrative effort than other more informal business types, but can often offer unique opportunities for your business.
Corporation owners are able to deduct many more expenses than those who own more informally structured businesses. These write-offs can include substantial personal living expenses such as health and life insurance, travel, and in some cases, even entertainment. Corporation owners are also free from paying certain self-employment taxes as well.
Personal asset protection
Even some of the most well run businesses fail for one reason or another. In the event that a corporation becomes unable to pay its debts, its owners are given limited liability status. This means that their personal funds or assets cannot used to settle the business’s debts.
Transfer of ownership
Formal corporate structures are designed to streamline sales of ownership shares in the business. The transfer of a C corporation’s ownership is typically done through the simple sale of common or unrestricted preferred stock. S corps do have a few more restrictions on ownership transfers, but still offer easier interest transfer than LLCs or other informal structures. This makes incorporation a must for any entrepreneur looking for an easy exit strategy.
Access to capital
Venture capitalists and other independent financiers typically will only invest in C corps due to the fact that ownership transfers are simple and have few restrictions. With the growing trend of many start-ups relying on these sources for funding, the C corp structure is becoming the most attractive option for organizations that hope for rapid growth. Stock sales to raise capital are only possible under the C corp structure as well. Even companies looking for traditional bank financing are finding it difficult to do so without being incorporated.
Separate legal entity for your business
Informal business structures aren’t perpetual entities. In the event that one of its owners dies or looks to sell the business, the company typically ceases to exist in its current form. In contrast, corporations have the ability to remain as is in the event of the passing of an owner or transfer of ownership.
Corporation owners have the ability to set up several different retirement plans and funds for themselves, such as 401(k)s. Typically these types of plans are only available to full-time employees of larger companies.
Although there are tons of benefits to incorporation, there are a few drawbacks to be aware of. The following drawbacks are not meant to deter incorporation, but to help you prepare and plan the most effective strategy for mitigating any of these issues.
Beyond the initial filing process, there is a great deal of ongoing paperwork and record keeping necessary to running a corporation. This administrative work can end up being quite costly in terms of labor, depending on the size of the organization.
Along with the great deal of additional paperwork involved with running and owning a corporation, there a several ongoing incorporation fees that must be paid as well. While these fees are often negligible for large organizations, they may make a noticeable impact on smaller corporations.
As you can probably tell, there are many variables that will effect your decision of whether or not to incorporate your business. If you’d like more information, tailored to your specific situation, don’t hesitate to talk it over with one of our experienced business professionals.