Incorporations: An introduction to the benefits of Incorporations
Let me start by saying that not every small business should incorporate.
Incorporation provides several key benefits to business owners, managers and entrepreneurs (more on this in a moment). But incorporation also burdens a business with extra taxes, extra paperwork, and more complicated accounting.
Accordingly, if you own or operate a very small business, perhaps a business you�ve just started, don�t rush to incorporate. Take time to consider not only the benefits but also the costs. Verify (by doing research using business incorporation service web sites such as this one) that you�re not creating a bunch of busy work for yourself.
Now that I�ve issued that warning to you, let me identify the two big benefits of incorporating your business�
First Big Benefit of Incorporating a Business: Minimizing Liability
The first big benefit of incorporating your business is that you reduce your business risk and business liability. But let me explain.
If you operate your business as an unincorporated sole proprietorship or as a partnership, your ownership in the business means you�re liable for all of the business�s debts. In a sense, any promise the business makes (or that your business partner makes, if you�re operating as a partnership) burdens you with liability.
With a corporation, in comparison, you are not liable for the debts of the business merely by reason of your ownership. If the corporation promises some vendor payment, agrees to repay some customer,or owes money to an employee, you�re not on the hook merely because you own shares in the corporation.
With a corporation, the worst-case scenario (in a sense) is that the corporation will have to sell everything it owns to repay or partially repay the people it owes money to. If the asset sale proceeds aren�t enough to repay the corporation�s debts, well, that�s too bad for the corporation�s creditors� but the shareholders in the corporation aren�t required to come up with the shortfall.
Second Big Benefit of Incorporating a Business: Minimizing Income and Payroll Taxes
Corporations also deliver a second, big benefit to small business owners: corporations can save their owners federal and state income taxes as well as federal payroll taxes. I talk about this in more detail on the C Corporation versus S Corporation page, but let me give you just a bird's-eye view here�
C corporations can provide their employees, including shareholder-employees with rich, tax-free fringe benefits. In certain circumstances, then, a C corporation allows a business owner to provide him- or herself and his or her family with tax-free benefits such as healthcare, life insurance, and housing. (The drawback to a C corporation, as discussed on the Taxation of Corporations page, however, is that C corporations may cause their owners to pay corporate income tax on the business profits.)
S corporations allow shareholders to avoid the corporate income tax on business profits and may even allow shareholder-employees to reduce the payroll taxes (Social Security and Medicare Taxes). Again, more information about this benefit appears on the Taxation of Corporations page and also in the do-it-yourself incorporation.