Whether you’re just considering a new business idea or already act as a sole proprietorship or general partnership, you may wonder if incorporating your business is right for you. Discover why the benefits of incorporation can outweigh any downsides.The pros of business incorporation
- Secure your assets, gain tax breaks. Corporation owners enjoy limited liability protection, and are typically not personally responsible for business debts. So creditors can’t pursue your home or car to pay business debts. Another plus: corporations often gain tax advantages, writing off such things as health insurance premiums, savings on self-employment taxes, and life insurance.
- Grow your corporation for now—and the future. Incorporating bolsters credibility, and may help you reach potential new customers and partners. And while you can’t live forever—your corporation can. Even if an owner dies or sells interest, the corporation still exists.
- Easy transfer and faster funds. Corporation ownership can be easily transferable (with some restrictions on S corporations). Capital can be raised more easily through the sale of stock. Another advantage is that many banks prefer handling loans with incorporated borrowers.
- Ready for retirement. Retirement funds and qualified plans, like a 401(k), can be easier to establish.
The cons of business incorporation
Corporations do have some potential disadvantages, including:
- Double taxation. C corporations are subject to double taxation of corporate profits when income is distributed as dividends. This can be avoided by electing S corporation tax status with the IRS.
- Ongoing fees. You must file articles of incorporation with the state, plus applicable fees. Many states impose ongoing fees—which are steeper for a corporation than for a sole proprietorship or general partnership.
- More record keeping. Corporations must follow initial and annual record-keeping requirements—which sole proprietorships, general partnerships and limited liability companies (LLCs) avoid.