For entrepreneurs, incorporating their business is something they must do in order to look more professional, protect their assets, receive tax advantages and increase their profits through the heightened ability to receive small business loans so they can grow.
So what does it mean to become an incorporated business?
Simply put, the definition of business incorporation means that you’re defining the terms of your business both legally and strategically.
Six top reasons to incorporate your business are:
- Personal asset protection
- Perpetual existence
- Tax benefits
- Increased professional credibility
- Brand protection
- Deductible expenses
Owning a business carries an enormous amount of risk. Becoming incorporated offers you important legal protection that can come in handy if your company were ever to go south and you had to liquidate.
In general there are three common small business legal structures:
Limited Liability Corporation (LLC)
This option is the most popular choice when incorporating a business because an LLC has many benefits, including liability protection, tax savings, management flexibility and easy maintenance. Small business owners of an LLC have the ability to raise money through investors or lenders. The only downside is that they cannot sell stock in their company.
- Owners need not be U.S. citizens or residents
C corporation (C corp)
This is a good option if you plan to take your business public in the future. Shareholders in C corps are protected from direct tax liability, but the company’s income is subject to double taxation when it’s distributed as dividends. What this means is that the corporation is taxed separately from its owners who may have to report their dividends as personal income. More demanding compliance rules also pertain to a C corp, such as not being permitted to distribute special allocations, and the requirement to hold annual shareholders’ meetings with recorded minutes.
- Unlimited growth potential through stock sales
- Unlimited number of shareholders
- Tax-deductible business expenses
S corporation (S corp)
Created through an IRS tax election, the S corp can avoid double taxation. Unlike the C corp, the shareholders of an S corp are taxed only on income they receive from the corporation through what’s known as a “pass-through.” What this means is that the taxation passes through to the owners, who report their share of profits and losses on their personal income tax return. S corps can raise money by selling shares, but only a limited number of people can purchase those shares.
- No double taxation
- Investment opportunities
- Owners can report business profit and loss on tax returns
Make sure that you carefully examine the different business legal structures and consult the proper parties before you decide which corporation is right for you. No one type is perfect for every business. Think about your industry and your personal business strategy when you compare the benefits of each legal entity.