As a new business owner, you may be wondering if you should incorporate your business.
The greatest advantage of incorporating is that your legal liability is limited. Generally, responsibility for debts and other liabilities incurred by the corporation will be limited to the business assets. Although there can be exceptions, your personal assets are not usually at risk. The downside is that there is a cost to incorporate and there can be tax consequences in some cases.
So, should you incorporate?
You might not need to incorporate your business. Liability may not be an issue or can possibly be covered by insurance, depending on the size and type of your business. Should this be the case, you can operate as an unincorporated sole proprietor as do millions of other business owners.
When deciding to incorporate you will want to review the different corporate form options. There are differences in tax and other issues, but each form offers limitation of your liability.
- C corporations – Many large companies operate as a C corporation which is the traditional form of corporation and has the most flexibility in structuring benefits and ownership. Double taxation is the biggest drawback to operating in this form. The corporation pays tax on its profits; then the profits are taxed again as they are paid to individual shareholders.
- S corporations and LLCs – Double taxation can be avoided with these forms of corporations. With no taxation at the corporate level, both are called “pass-through” entities because profits or losses are passed through to the shareholders and reported on their individual tax returns.
There are some ownership limitations with S corporations. According to tax law, there can only be one class of stock and there can’t be more than 100 shareholders who are U.S. citizens or U.S. residents. A popular choice for many businesses is a state registered LLC as they offer certain tax advantages and more flexible ownership rules than S corporations.
Choosing the right form of business is important whether you’re already in business or just starting out. Sometimes even established businesses change from one form to another during their existence.
For advice on selecting the form that will best suit your business, give us a call.
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