7 benefits of starting a corporation

As recent business applications gain momentum in the middle of the yr, in line with the Census Bureau, 2024 is shaping as much as be one other above-average yr for entrepreneurship in the United States, though it won’t hit the same record-breaking pace as 2023. That means tens of millions of entrepreneurs will have to navigate a long list of questions about the way to turn their business dreams into reality.

A key query is what structure every company should have.

Whether you’re just starting out in business or you’re already operating as a sole proprietorship or partnership, you could be wondering about the benefits of forming what you are promoting as a corporation. Business owners often consider that forming a business is too expensive or too time-consuming, neither of which is true.

The benefits that entrepreneurs gain by forming their business as a corporation normally outweigh any perceived disadvantages. These benefits are, in many cases, unavailable to sole proprietorships and general partnerships.

The benefits of establishing a company include:

• Limited liability – Corporations provide limited liability protection to their owners (called shareholders). Owners are typically not personally liable for the debts and obligations of the business; subsequently, creditors cannot sue owners for personal property, resembling a home or automotive, to pay the business debts. On the other hand, in a sole proprietorship or general partnership, the owners and the business are legally considered the same, and personal property may be used to pay the business debts.
• Tax benefits – Corporations often have tax benefits, resembling deductibility of medical insurance premiums paid on behalf of the owner-employee; savings on self-employment taxes because corporate income is not subject to Social Security, employees’ compensation, and Medicare taxes; and deductibility of other expenses, resembling life insurance. For information on the types of tax benefits what you are promoting may receive by forming a corporation, seek the advice of with an accountant or tax advisor.

• Establishing credibility – Forming a partnership may help a recent business build credibility with potential customers, employees, suppliers and partners.
• Infinite life – The life of a corporation does not depend on its owners. A corporation has the feature of unlimited life, which implies that if the owner dies or desires to sell his share, the corporation will live on and conduct business.
• Transferability of property – Ownership of a corporation is normally easily transferable. (However, there are restrictions on ownership of an S corporation.)
• Raising Capital – Capital may be more easily raised through the sale of stock. In addition, many banks, when providing a loan to small businesses, want the borrower to be a registered company.
• Retirement plans – It shall be easier to establish retirement funds and qualified retirement plans resembling 401(k).

Operating a corporation also involves certain inconveniences.

Potential disadvantages of corporations include:

• Double taxation – C corporations are subject to double taxation on corporate profits when corporate income is distributed to owners in the form of dividends. The double taxation occurs when tax is first paid at the corporate level. If corporate profits are then distributed to owners in the form of dividends, the owners pay tax at the individual level on that income. The double taxation may be avoided by electing S corporation tax status with the Internal Revenue Service.
• Establishment and ongoing costs – To form a corporation, you could file articles of incorporation with the state and pay the applicable filing fees. Many states impose fixed fees on corporations, resembling an annual report and/or franchise tax. While these fees are often not very high for small businesses, forming a corporation is dearer than forming a sole proprietorship or a general partnership, each of which do not have to file filings with the state.
• Corporate formalities – Corporations are required to comply with each initial and annual recordkeeping tasks, resembling organizing and properly documenting initial and annual meetings of directors and shareholders, adopting and maintaining articles of association, and issuing shares to owners. Sole proprietorships, general partnerships, and even LLCs are not subject to the formalities imposed on corporations.

If you have specific questions about whether a corporation is the best structure for what you are promoting, it is best to hunt advice from an attorney or accountant.