When an entrepreneur starts a new business, one of the first decisions they have to make is what form of business organization, or business entity, to have. Are you going to incorporate your business? There are many choices - sole proprietorship, partnership, C Corporation, S Corporation, LLC, LLP, and more. This issue should have already been covered in the company's business plan. This article will help you make that decision.
What are the Characteristics of a Corporation?
Incorporation means to combine in one mass or to assimilate. Some of the characteristics of a corporation is that incorporated company is treated legally, in some ways, like an individual. It can sue or be sued. It files taxes on its own. One of the most popular characteristics is that it provides the owner or owners of the business with limited liability, which means that if the corporation gets sued, the owners' personal assets are protected. Corporations have continuous life. They do not die if an owner dies. They provide easy transferability and divisibility of assets.
Benefits of Incorporating your Business
Some specific examples include the issue of taxes. Corporate tax rates are much lower than personal tax rates. As a result, a business that is incorporated can provide income to the owners that an unincorporated business cannot. Another example is the issue of liability. A corporation protects its owners through the characteristic of limited liability. Assets are owned by the corporation and the corporation, not the owners, are responsible for all liabilities.
Other characteristics of a corporation is that it has easier access to the capital markets than a business that is not incorporated; in other words, it can raise equity financing, in particular, easier or float a bond issue. Corporations can set up retirement and health insurance plans not available to individuals. Corporations also have credit ratings separate and apart from their owners.
Disadvantages of Incorporating your Business
One major disadvantage of incorporation is called double taxation. This means that income is taxed once on the corporate level. Then, when the income is paid in the form of dividends to stockholders, it is taxed again on the personal level of the stockholders.
Another disadvantage of the corporate form of business organization is simply paperwork. It becomes more necessary for the business firm to hire an accountant, particularly for taxes. Paperwork is just more with regard to complexity and volume.