To Incorporate or Not Incorporate?

Whether or not to incorporate your business depends very much on your type of business, the potential liability and how big you want to grow your business.

If you are a one-person operation, and there is very little risk that you will be sued by someone, and you have no desire to grow, you could operate as a Sole Proprietor.

The biggest advantage of incorporating your business is that you as the owner (shareholder) limit your personal liability. Generally, shareholders are not liable for obligations of the corporation. If the business runs into problems, the creditors will not come knocking at the door of the shareholders to collect the debts of the corporation. As a Sole Proprietor or a simple Partnership, you, as owner of the business, are liable and your personal assets are at risk.

There are both advantage and disadvantages incorporating a business versus operating it as a Sole Proprietorship or a simple Partnership. The main advantages and disadvantages are:

Advantages

• Limited Liability for the Owners/Shareholders
• A Corporation is a separate legal entity and its life continues even after the owners die or sell the business
• Ownership is easily transferable
• More Tax Planning options
• Easier to raise capital for the business
• No one else can operate a business under the same or similar registered name
• More credibility with the business and financial community

Disadvantages

• There are expenses to set up a corporation and annual expenses to maintain it.
• Record keeping is more onerous.
• Operating across state lines can be more difficult.

What Type of Incorporation

There are several options when you wish to incorporate your business if the focus is limiting your personal liability. The most common types of corporate entities are:

• Corporation or "C" Corporation
• "S" Corporation
• Limited Liability Company or "LLC"

All advantages and disadvantages listed above over a Sole Proprietor or Partnership apply to all of these structures. The main difference among these is how the corporation's income is taxed and how capital can be raised.

Main Considerations for the Type of Corporation

Below are some characteristics of each form of corporate entity that are generally considered suitable for small businesses.

"C" Corporation

• Possible Double Taxation because the Corporation is taxed and dividends paid to the shareholders can be taxed as well.
• The number of shareholders is unlimited.
• Several Classes of Stock can be issued.

"S" Corporation

• No Corporate Income Tax because income/losses are passed through to the shareholders.
• Only one class of stock permitted.

Limited Liability Corporation or "LLC"

• No Corporate Income Tax as income/losses are passed through to the shareholders.

 

You do not necessarily need to engage a lawyer to incorporate a business. A visit to the website of the Secretary of State in which you wish to incorporate will be enough to set up a corporation. In many states the entire application process can be completed on line.

However, if you feel more comfortable using an expert, there are a number of companies that, for a reasonable fee, will incorporate the business for you. We recommend you use one of the companies advertised on the right side bar.