Incorporating a business isn’t for everyone. It can be expensive: the filing fee for corporations is generally higher than unincorporated businesses. It can be time-consuming :there is a great deal of paperwork to complete and maintain, and compliance requirements at each jurisdiction.
But the benefits of incorporating a business can be incredibly rewarding, both in terms of finances and personal satisfaction. Let’s look at three common reasons to incorporate.
Limited Liability Protection
An unincorporated business—a sole proprietorship, for instance—provides no limited liability protection; any debts or obligations of the business are directly tied to the owner of that business. In other words, if a sole proprietorship is sued, it is the sole proprietor him- or herself who is sued.
By contrast, a corporation provides limited liability protection to its owners. Because a corporation becomes a new legal entity (a legal “person” with many of the same contracting rights as you and me), the entity stands alone and is itself responsible for its debts and obligations. Incorporating a business means that if the business defaults on a loan, provided that it has acted properly and within the law, the individual owners’ personal assets are not at risk if the business cannot pay back the loan.
Note: Limited liability is not a license for a corporation to run rampant and take out excessively risky loans with no real plan or intention to pay them back. The corporate veil, the legal separation between corporation and owner, can be disregarded if fraudulent activity is suspected.
Taxes and Corporate Benefits
While an unincorporated business entity pays a federal self-employment tax of 15.3%, corporations are taxed only on their corporate income.
In one type of corporation, a C corporation, the corporation is taxed on its income, and then the shareholders are taxed on the dividends they receive for shares owned. Eligible corporations may also elect to be taxed as an S Corporation, in which corporate income tax is eliminated entirely, and only the individual shareholders are taxed on their individual earnings from shares.
A corporation is also able to provide health/dental insurance, a 401k, monthly parking permits, and other employee benefits. An unincorporated business is not able to write off these expenses.
Professional Public Image
The addition of “Inc.” or “Corp.” to your business name may not seem like a big deal to you—it’s just an extra syllable, after all, tacked onto the end of your name almost like an afterthought—but consider what this “afterthought” means to the public.
That tiny corporate ending shows the world you’re serious about your business, serious enough to jump through the hoops necessary to create an entity that can exist on its own, without you. Unlike a sole proprietorship, which would terminate along with the owner, your customers can be confident that even if you personally retire or quit your business, the company itself will continue.