If you’re a sole proprietor, you have probably wondered at some point whether you’d be better off if you incorporated your business. Here are some facts for you to consider.
The single biggest benefit of incorporating a business is limiting an owner’s liability.
In theory, a stockholder in a corporation risks only his or her investment in the corporation stock. A lawsuit against the company generally cannot be satisfied by attaching the stockholder’s personal assets.
In practice, most small corporation stockholders must personally guarantee bank loans for their corporations. Thus, if the corporation fails, the stockholder’s personal assets are at risk.
In addition, where personal services are involved, the individual performing the services may be personally liable for his or her actions even though the business is incorporated.
The second advantage of operating as a corporation is that it may be easier to raise capital because the business can do so by issuing stock and selling bonds.
A third advantage is that ownership interest in a corporation is easier to transfer than in a sole proprietorship.
A corporation files its own tax return and pays its own income tax. Therein lies the major drawback to the corporate form: business profits may be taxed twice – once at the corporate level and again at the shareholder level when paid out as dividends or liquidating distributions. Double taxation can generally be avoided by electing S corporation or LLC status.
The corporate form does allow for more fringe benefits that are deductible by the corporation and tax-free to employees, including an owner-employee.
No business owner should incorporate without carefully considering the pros and cons of doing so.
Please note we use affiliate links to products for which we may receive compensation. We use these products and recommend them because they are companies that we have found amazing and trustworthy.
As always, should you have any questions or concerns regarding your tax situation please feel free to contact us.
Stay Up To Date on Taxes that Affect You!! Subscribe to our General Taxpayer Weekly Tax Tip that includes bite-size and informative tips on tax and financial changes, Monthly Client Update Newsletter, and updates on our events and seminars. Follow CD Tax on Facebook!