Do I Need to Incorporate My Business?
Few companies need to incorporate, but there are many good reasons to do so. The most important immediate benefits from incorporation are the limited liability protection for owners, the ability to receive investment funds, and the flexibility to expand the business. Downsides include the typically higher income tax rates versus personal tax rates and the extensive documentation and reporting responsibilities of corporations.
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Limited Liability Protection
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Unlike most partnerships and all sole proprietorships, corporations offer limited liability for all owners. Should serious business problems occur, creditors cannot legally attack the personal assets of the owners. Therefore, even in the most dire business situations, corporation creditors cannot sue stockholders personally to endanger their homes, autos, bank accounts, or investments, to recover monies due. However, if the corporation has committed an illegality, such as fraud, the U.S. courts often pierce the corporate veil and allow creditors to sue owners personally, as a result of the deception.
Receiving Investment Funds
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A corporation's ability to authorize, issue, and sell stock makes it relatively easy to accept new investment dollars when needed. Partnerships, sole proprietorships, and limited liability companies face more challenges. While they can borrow money, taking in new investors is legally problematic, as they have no instruments, like stocks, to offer potential investors. If a corporation was organized properly, authorizing enough stock that can be issued to investors when appropriate, they can simply exchange shares for dollars.
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Corporate Expansion
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Since corporations are legal entities, much like individuals, they have an infinite existence and face no restrictions on expansion. While most corporations will not reach the size or influence of Microsoft or IBM, they can expand, contract, and sell or purchase other companies at will. Should they be very successful and grow immensely, they can become public companies, with its stock traded on a securities exchange. This expansion flexibility is far superior to major growth obstacles faced by partnerships, LLCs, and sole proprietorships, which have only limited ability to expand as legal entities.
When to Incorporate
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Analyze the nature of your business, your future plans, and the costs and responsibilities of incorporation before deciding on a structure for your company. Consult with a trusted adviser if you are unsure of the ramifications -- income, tax, cost, and liability -- of forming a corporation versus choosing another structure. For example, small businesses with multiple owners may enjoy benefits similar to a corporation by creating an LLC. With limited liability features, LLC owners are taxed as individuals, distributing company income to owners to be included in their personal tax returns -- and at personal tax rates. However, if you plan to grow and expand your business, a corporation might be the best option for the future.
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