If you’re a business owner, one of the first questions to ask yourself is whether you should incorporate. The biggest advantage of incorporating is it limits your legal liability.
Your responsibility for debts and other liabilities incurred by a corporation is generally limited to the assets of the business. Your personal assets are not usually at risk, although there can be exceptions to this general rule. The trade off is that there’s a cost to incorporate and, in some cases, tax consequences.
So, should you incorporate?
You may not need to. Depending on the size and type of your business, liability may not be an issue or can be covered by insurance. If so, you could operate as an unincorporated sole proprietor.
If you choose to incorporate, you’ll have to decide between a couple of entity types or business structures. They each can limit your liability, but differ in tax responsibilities and other issues. Here are your options:
The traditional form of corporation is the C corporation. This type of corporation has the most flexibility in structuring ownership and benefits. Most large companies operate in this form.
The biggest drawback is double taxation. First, the corporation pays tax on its profits. Then, profits are taxed again to pay individual shareholders their dividends.
S corporations and LLCs
These forms of corporations avoid double taxation. Both are pass-through entities because there’s no taxation at the corporate level. Instead, profits or losses are passed through to the shareholders and reported on their individual tax returns.
S corporations have some ownership limitations. There can only be one class of stock and there can’t be more than 100 shareholders who are U.S. citizens or U.S. residents.
State registered LLCs have become a popular choice for many businesses. They offer more flexible ownership rules than S corporations, as well as certain tax advantages.
Whether you’re already in business or just starting out, choosing the right form of business is important. Even established businesses change from one form to another during their lifetime. Consult with your accountant and your attorney to make sure your business is structured appropriately.
Have questions about incorporating your business? Let’s talk!