Understanding the Benefits of Business Incorporation
By: Blair Wood
Maybe you have owned a small business for many years and often wondered about the benefits of business incorporation. Thousands of sole proprietors weigh the pros and cons and make the leap to business incorporation. First, it’s important to understand the differences between sole proprietorships and corporations. In a sole proprietorship, the owner is personally liable for any business debts. If the assets of the business are not great enough to cover the debts, the creditors can go after the owner’s personal assets to satisfy the debt. When you form a corporation, the stockholders are the owners of the corporation. A key benefit of incorporating a business is the stockholders are not liable for corporate debts. A word of caution, there are certain circumstances when an individual stockholder can be liable for corporate debt. The term often used is “piercing the corporate veil”. Prior to business incorporation, it would be prudent to understand each of these circumstances. Just a few examples are:
- Failure to keep personal funds separate from corporate funds.
- When the corporation fails to have director and shareholder meetings.
- An individual stockholder personally guarantees a debt.
Other benefits of business incorporation are once you form a corporation, the business can out live its stockholders, director or officers. And the sale of a corporation can be less disruptive to the day to day operations of the business.
As the tax deadline looms over each and every one of us, let’s look at how incorporating a business can be a benefit at tax time. These are just a few examples. For tax planning, you should consult a tax advisor or an accountant.
- The earnings of sole proprietorships are subject to self-employment taxes. When you incorporate your business, only salaries are subject to these types of taxes.
- Corporations can utilize what is commonly known as “incoming shifting” to take advantage of lower income brackets.
- The rules for business losses can be more stringent for the sole proprietorships than corporations.
The decision to incorporate a business is one that should not be made overnight. If you decide that business incorporation is right for you there are incorporation services that can help you with the necessary forms and filing. There are many incorporation services out there. It is important to choose one that focuses on your individual needs while you focus on your business.
About the Author:
Blair spent 20 years in corporate America in a variety of roles including operations, human resources and marketing. Currently she works as a consultant and free lance writer specializing in assisting small businesses in the first 3 to 5 years of their life cycle.
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