Why Do People Incorporate?
Should you incorporate or not? That is a question that a lot of business owners ask themselves. To answer this question, business owners should understand the benefits that incorporation offers: easier means of raising of capital, legal protection, tax benefits, and the firm existing as a legal person.
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Raising Funds
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An important reason to incorporate is to increase your ability to raise funds for your business. A corporation has two methods of raising funds. Firstly, a corporation can sell stocks to investors in the firm. Corporate stocks can be publicly traded, which makes them easier to move. Secondly, corporations are able to issue securities. Securities are corporate bonds that can be sold with the promise of a specified return after a set number of years.
Protection
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Incorporating a business is an effective way of legally protecting the owners of a business. In a sole proprietorship or a partnership, the owners are responsible for all the debts of the firm. For example, if a sole proprietor goes into debt and the business assets will not cover it, creditors can go after his personal assets including his home. By incorporating, it limits creditors to seeking the assets of the firm alone.
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Tax Benefits
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Incorporating allows you to make more tax deductions. Benefits such as health insurance and life insurance, even for yourself, may be tax deductible. Also, corporations can claim losses as tax deductible and roll them over to future years to count them against profits. There are no limits to claiming losses, whereas sole proprietors cannot claim in excess of $3,000 in losses.
Acting as a Legal Person
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A corporation has the same standing as a legal person. This provides several benefits. A corporation can hold property, including stocks, and it receives dividends from stocks 70 percent tax free. A corporation also has the ability to engage in legal contracts and to take legal actions. A corporation can have a credit rating that is separate from that of the owners, offering them protection against a bad credit score should the company undergo financial hardship.
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References
- Photo Credit incorporations articles image by Keith Frith from Fotolia.com
