The beginning of anything should be secure so that it can sustain for long. Incorporation is something like giving a strong foundation to a long-term business plan. An incorporated business exists as a separate entity in the state and enjoys all the rights of the state, except the right to vote.
One can incorporate a business by filing an article of incorporation with an appropriate agency in the state. By using a corporation, its investors invest money in new ventures without the risk of further liability. The enterprise shares the profit among the shareholders and if it fails, then it loses only the initial investment.
Incorporation involves capital investment and has to keep a record of the business for submitting an annual record but still there are some other reasons that make business incorporation a nice idea even to start a small business.
Benefits of Business Incorporation
1. Indefinite Life
A corporation is owned by its stockholders and managed by its employees. Its work is not affected by the sale of stock, death of the stockholder or inability of an employee to function. It keeps on running until it accomplishes its objective, merges with other business or is bankrupted.
2. Transfer of Shares
Unlike sole proprietorships that involve a lot of cost and time to transfer a share or property to another member of the family, the corporation represents the owner’s right and possession by the share of the stock they hold. To sell or dispose of any share, a shareholder just needs to approve and sign over it at the back of the stock certificate.
3. Raised Investment Capital
A corporation provides the most flexibility of ownership. Several types of stocks can be issued and sold to finance the business. This easily attracts new investors to invest in the corporation.
4. Limited Liability
Both corporation and limited liability company (LLC) offer protection from business liability for business owners or shareholders. The corporate acts as a separate entity that will pay its taxes, enter into contracts, and is itself responsible for debts or any legal actions. Thus, the owners of a corporate are not responsible, in personal capacity, for its debts or obligations.
Adding “Inc.” or “LLC” after a business name adds an authenticity that makes a corporation a preferable choice for creditors, vendors, employees, and partners.
6. Tax Advantages
Corporation protects one from double taxation on corporate profits and dividends by electing Subchapter S tax status. It provides tax benefit by deducting the amount from the total income by providing health care plans to the organization members at business expense.
7. The Flexibility of Ownership
C-corporation has a high flexibility of ownership. Anyone can be a shareholder of C-Corporation. This increases the source of capital and partners for a business opportunity.
8. Retirement Plans
A corporate can establish retirement funds and qualified retirement plans with ease.
Disadvantages of Incorporation
As the same tree reaps both sweet and sour fruits, in the same way, a business corporation has some disadvantages as well.
1. Double Taxation
A C-Corp has to pay tax both at the individual and corporate level. However, one can avoid it by electing for S-Corp tax status with the Internal Revenue Service (IRS).
2. Formation and Ongoing Expenses
Compared to a sole proprietorship or general partnership, forming a corporation is an expensive process. It includes fees for filing Articles of Incorporation with the state, annual reports or franchise tax fees.
3. Corporate Formalities
A corporate has to do assigned tasks, such as holding and documenting annual meetings, adopting and maintaining by-laws and issuing shares of stock to the owners.
After coming across the pros and cons of incorporation, if you have made up your mind for starting an incorporated business, then you’d need to submit an Article of Incorporation and follow a few steps to establish your dreams. However, you can lessen your burden by using various corporation services.