Why Incorporate? The Benefits Of Organizing Yourself As A Corporation
Choosing how your company should be organized is one of the most important decisions you will make as a company. While incorporation might be the best decision in certain situations, in some instances, however, it can be a pointless decision, and thus each business should carefully measure the benefits (and challenges) of incorporation before continuing to move forward.
In this article, we will explore the benefits of incorporation so you can see if it’s best for you. But before that, however, what is a corporation?
The easiest way to understand what corporation is to imagine it as another artificial person (with limited privileges and rights). Incorporating a company is creating a separate person, thus separating the company from its owner. When you think of it that way, you’ll see that a business has a life on its own.
As a separate entity, the business becomes independent from the investors, owners and it is employees. No matter what goes on with the investors, or even the company directors, or even the employees, the organization itself is constantly alive in perpetuity until the time when the company directors and investors choose to dissolve it as an organization.
Inside a sole proprietorship or general partnership in which the owner or owners may be the business, what affects the owner may modify the business. Any consumer debt or liability of the owner or partner enables the creditor to pursue the assets of the business to pay for any debt or liability. In addition, the personal bankruptcy of the owner or partner will directly impact a company by opening its assets to the creditors. Also, in case the owner or partner dies, the company is usually dissolved. All this could be easily prevented by organizing the company as a separate entity.
By incorporating a company, the private finances of the owner or partner remains outside the finances of the corporation and enables the company to carry on without disruption, even when the owners dies.
Even if a business owner remains dedicated to the prosperity of the company, there might be occasions when the he or she will have to leave the company. No matter the reason why for the departure, incorporation enables the transferability of interest in one person to another person.
Generally inside a partnership, someone cannot transfer his/her interest in the business to another person with no express consent of the other partners. If your partner still decides to leave without consent from the other partners, their ties to the company are instantly dissolved.
Incorporating a company removes this limitation by permitting investors/proprietors to freely transfer his/her interest to another person with no unanimous consent of other investors. Smaller businesses could see the limitations of moving shares as a positive thing and might want to control the way an investor transfers his or her interest and to whom. Incorporation enables this versatility too. The disposable transferability of shares is really a default rule, but in no way could it be mandatory for those incorporated companies. Companies can place limitations around the transferability of certain shares and thus, even when this advantage of liquidity might be seen as a hindrance to some business, incorporation allows the company to decide if you should utilize this option. More to the point, unlike legal partnerships, incorporating prevents a minor investor from dissolving a company without cause.
Among the finest benefits of incorporation is its limited liability. As pointed out above, any debt or liability against a particular investor remains outside of the organization. Likewise, the reverse is similarly true. Any debt or liability against an organization doesn’t open the doorways of the shareholders’ assets to the creditor.
The shareholder’s liability in almost any corporate debt or liability is restricted unless if there’s fraud. Inside a sole proprietorship or general partnership, the owner and/or general partners remain completely prone to any debt or liability stemming from the business. If the company is not able to pay its debts, the creditor can attack the personal property and assets of the owner or partner to satisfy the debts.
While risk is part of any business, you can and should minimize risk to make your business more attractive to investors.
The main hindrance to incorporation is the taxes involved. Inside a sole proprietorship or partnership, the taxed earnings from the business flows straight to the owner and/or partners and therefore are taxed based as personal income. However, since the corporation is recognized as another entity, the taxed earnings of the corporation are taxed first as corporate tax.
When the corporation decides to distribute the rest of the earnings towards the investors, that earnings is taxed once again (basically, a dual-taxation). The marginal tax rate for any corporation could be considerably greater compared to marginal tax rate for any sole proprietorship.
However, smaller businesses can avoid this double-taxation by benefiting from the choices provided to business provided by the government states. Some options include incorporating as an S-corporation or filing like as an LLC.
These options permit the taxed earnings to circulate straight to the investors without having to be taxed two times, yet maintaining the advantages of incorporation.
Beyond the numbers and legalities there are something psychologically advantageous about incorporation.
No doubt incorporation is a daunting task, but it’s also a thrilling moment for your business. With incorporation, your business turns from an idea into reality. Sometimes this mental step of seeing the company as something real will further motivate and encourage you to bring greater success for your business.
Incorporating demonstrates your company’s authenticity to both clients and investors. Adding “Corporation.” or “LLC” after the company provides you with the credibility and professionalism that lots of clients are searching for.
You can file all of the necessary documents yourself. However, considering the time involved in doing things that are necessary to incorporate your business, it’s much better to have another company do it for you. There are companies out there that offer incorporation services for only $69, excluding government fees.