Corporations – Should you Incorporate

Facebooktwittergoogle_plusredditpinterestlinkedintumblr

Corporation Should you Incorporate
One of the oldest forms of business organization,the existence of corporations predates the United States. In today’s world, a corporation is defined as a type of business that exists as a separate legal entity from those who own and control it. There are a couple different kinds of corporations, and which one is best for your company will vary according to your circumstances.

Different Types of Corporations

Traditional corporations are also known as C corporations. These are what constitute the bulk of really big companies that come to mind when we think of corporations. The company itself is a separate legal entity that is responsible for its own debts and liabilities, and it pays taxes on its earnings. When shareholders receive dividends from the company, they must then report this on their own personal income tax filing. This is a double taxation that plagues the standard corporate business model.

An S corporation, or small business corporation, is similar to a traditional corporation in nearly every way except for purposes of taxation. These companies are treated more like a partnership for tax purposes in the sense that the tax liability for any company profit is passed down to the individual owners of the company. The tax liability is divided up among the shareholders in direct proportion to the number of shares in the company that each of them owns. This eliminates the double taxation problem of traditional corporations. Not all companies can elect to become an S corporation, however. Not being allowed to have more than 100 shareholders or have more than one class of stock are just a couple of the rules that bar many larger companies from qualifying.

A professional corporation is another type, however, it is typically only available to certain professions. The professions that are allowed to form their company into professional corporations varies from state to state but typically includes accountants, doctors, veterinarians, lawyers and psychologists. This offers many of the tax and limited liability benefits of traditional corporations. In some states, this type is the only legal option for certain professions while others allow them to form as a professional, S or C corporation.

Advantages of a Corporation

The biggest advantage of all types of corporations is the limited liability to shareholders due to the company being its own legal entity. Shareholders can have the peace of mind of knowing they can’t be held personally liable for the debts incurred or judgments obtained against the company. The other huge benefit is that corporations can raise money simply by issuing more stock. The transfer of stock also makes for easy transfer of ownership in the company.

Disadvantages of a Corporation

The main downside to incorporating as a traditional corporation is the aforementioned double taxation. The corporation files a tax return and pays taxes on company income, and then all shareholders have to do the same on any portion of earnings that’s issued as a stock dividend. The S corporation option can sidestep this issue, but many companies, particularly big ones, will not meet the qualifications to file with the IRS for S corporation status. Corporations are also more expensive to set up than partnerships and sole proprietorships.

How to Incorporate Your Business and How to Operate a Corporation

You form a corporation by filing an application for a charter in the state in which you wish to form it. This will include basic facts such as the name, address and the purpose of it as well as details such as the quantity and type of stock it will be able to issue. Definitely only take the corporate plunge if you know what you are doing or have expert help on the process. Corporations require annual meetings and also that the directors and owners observe certain formalities. There will also have to be fillings made to the state in which you are incorporated on a regular basis in addition to annual fees. While starting and running this type of business certainly is manageable, it may be a good idea to seek legal counsel at some point, especially if it is already a profitable company that you are planning to incorporate, to make sure everything is in order.

When it Is Best to Incorporate Your Company

The limited liability and ease of raising capital really make this the ideal business structure for a company that is looking to grow much bigger and needs the protection and capital to be able to do so. The S corporation election now also makes it a viable option for small business as well. Typically, when one is just starting out in business and there isn’t much in the way of assets to protect, a sole proprietorship or partnership is the way to start. However, if you have been in business a couple years and it has been growing and expanding and you find yourself with employees and increasing wealth that you want to shelter from liability, it may be time to take the corporate plunge. You can start as an S corporation and get the best of both worlds of liability protection and avoid double taxation.

Some small business owners may even want to explore the possibility of starting as an LLC and then electing to become an S corporation. Technically, an S corporation is just a tax filing status with the IRS. It is normally applied for by those who are already in a C corporation, but nothing bars someone who is running their business as an LLC from seeking this tax classification. A limited liability company provides for easier operational overhead without all those required annual meetings and certain other formalities. LLCs and S corporation tax status each have their own unique advantages that may blend well together.1 Of course, this option is only available to small businesses. For larger, growing companies, it is generally wiser to incorporate in order to enjoy the two major benefits that this venerable and time-honored business structure has to offer.

1 http://smallbiztrends.com/2014/02/should-llc-elect-s-corp-status.html

Leave a Reply