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Pros and Cons of Forming a Corporation

Finance

Most business owners form corporations to protect themselves against financial and legal liabilities. In other words, a corporation keeps your business dealings, assets, and bank accounts separate from your personal assets.

Perhaps you already keep personal and business assets separate on a financial level and think incorporating is not worth the hassle. Think again. There are many more reasons why you should incorporate your business, and only a few reasons not to.

Let’s look at the disadvantages of incorporation first:

  • Money: It’s not cheap to incorporate, so if you’re just starting out and cash flow is an issue, know that you’ll be paying for such costs as state filing fees, franchise tax, attorney fees (if you need an attorney), and other government fees.
  • More paperwork: As a corporation, you’re required to file Articles of Incorporation, bylaws, corporate minutes, certificates of good standing, and other paperwork on a regular basis.
  • More taxes to file: You’ll need to file a separate tax form and can’t claim any personal tax credits on it. Plus, business losses can only be applied to the business -- they can’t help you on your personal taxes.

As far as advantages to incorporating, most businesses will choose one form of incorporation -- a C corporation, an S corporation, or limited liability company (LLC) -- solely to protect the business owner and stockholders from personal liability for the business’s debts or actions. Each structure has its own individual advantages and disadvantages based on its taxation rules, organization, and administrative overhead.

Let’s look at the advantages of forming a corporation:

  • Separate liabilities: A corporation is an entirely separate legal entity from its owners and shareholders. That means that in situations such as the company being sued or the corporation owing debts, the owners and shareholders cannot be sued or held personally liable for the debts.
  • Investors: If you’re trying to raise capital by selling shares in the company, you’ll need to be incorporated. You’ll also need to form a corporation if you ever plan to go public.
  • Taxes: Depending on the corporate structure under which you choose to do business, you can elect to have pass-through taxation to your personal taxes, or you can avoid double taxation.
  • Never-ending business: A corporation remains a corporation even if the owner leaves, dies, or sells off the company. It’s called perpetual existence.
  • Credibility: A business with an Inc. or LLC extension after its name often sounds more credible to outsiders. You’ll most likely attract more partners, customers, and attention from the community if you choose some form of incorporation. Being incorporated can also help protect your business name in the state in which you do business.