The Reasons Why Incorporation Is an Effective Idea for Businesses
Incorporation is an effective idea for businesses because of the legal and tax benefits received by corporations. Operating as a corporation may help the company attract higher-quality employees who may be attracted to fringe benefits and stock options offered.
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Liability
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One of the biggest reasons why incorporation is a good idea for business owners is the limited liability protection provided when operating as a corporation. Owners of an incorporated business do not have a personal obligation to pay company debts and liabilities. This means a business creditor cannot pursue an owner's home, car, jewelry or other personal assets as compensation for company obligations. If the company loses a lawsuit, the judgment does not extend to an owner's personal assets. Corporations are treated as a separate legal entity from the shareholders, directors and officers who own and operate the business.
Raising Money
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Another advantage of incorporation is the ease of raising capital in comparison to other business structures. For example, sole proprietors and partnerships have to rely on the personal credit history of the company's owners as a way to secure financing for the business. In a corporation, the company can issue shares of stock to raise money for expansion or to meet existing obligations. Additionally, corporations have the ability to offer shares of the company on public stock exchanges like NASDAQ or the New York Stock Exchange. This provides a corporation with the potential to raise huge sums of money to finance its operations. Other business structures like limited liability companies, partnerships and sole proprietors lack the ability to issue stock.
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Structure
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Unlike other business structures, corporations have a definitive structure that must be adhered to. This makes it easy for a corporation to organize the company and establish the responsibilities of owners and employees. A corporation must have at least one person serving on the company's board of directors. Board members have the responsibility of implementing strategy and policy and allocating company resources. Board members must select officers, like a treasurer or secretary, who have the responsibility of managing the company's day-to-day affairs. Sole proprietors, partnerships and LLCs do not have a definitive organizational structure, which may cause confusion regarding the roles and responsibilities of company owners and managers.
Continuity
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For owners who wish to leave a lasting legacy through their business efforts, incorporation offers a way to establish continuity not witnessed in other business. Sole proprietorships and partnerships end automatically if an owner or partner becomes disabled, dies or retires. Incorporated businesses are the most enduring form of business, which means the company will continue to exist despite changes in ownership or management. An owner can die or sell his interest in a corporation without affecting the day-to-day affairs of the company.
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