Should You Incorporate your Business
By Aaron Larson
August, 2004; Last Reviewed Dec., 2010
The question of whether or not to incorporate your business is not always easy. This decision is often best made after consulting your accountant, and possibly a small business lawyer.
There are practical, financial, and tax considerations which come into play.
Considerations for those who are weighing whether or not to incorporate include :
Limited Liability - Is your business of a type where you would benefit from the limited liability afforded to a corporation, so as to shield your personal assets from corporate creditors or liabilities?
Costs and Fees - Will the cost of incorporation, payment of annual franchise fees, and of creating an appropriate accounting system and maintaining corporate bank accounts, exceed the benefit of incorporation?
Complexity - Will the added burden of maintaining the corporate structure, implementing proper accounting systems and procedures, and conducting annual meetings and filing annual reports with the state, impose an undue burden on your business?
Taxation - Will you and your business have a reduced or increased tax burden if you incorporate, or will it remain unchanged? If you incorporate, will you benefit from the pass-through taxation of the S Corporation, or through paying corporate taxes as a C Corporation?
Fringe Benefit Packages - Will you benefit from the deductability of the fringe benefit package offered to shareholder employees, which is enjoyed by C Corporations, as opposed to having those fringe benefits taxed as income to the employee?
Investors and Employees - Will the greater flexibility offered through the issuance of stock, and the possibility of offering stock options, help attract investors and help attract and retain key employees?
Structure - Will your business benefit from the structure required of corporations, with the various rights and duties of corporate stockholders, directors, and officers?
Succession Planning - Will the fact that the corporate structure continues indefinitely, with transfer of ownership possible through the sale or transfer of stock, assist with succession planning or your estate planning goals?
Transfer of Shares - Will your business benefit from the ability to transfer shares? Can you adequately control any risk of shares being transferred to or inherited by undesirable parties by implementing a buy-sell agreement restricting transfer of shares?
Public Records - Will you be required to disclose information into public records, such as the identity of your corporation's directors, which you would prefer remain confidential?
Many businesses find that they receive adequate protections from liability by forming as limited liability companies, while also avoiding much of the cost and complexity of forming as a corporation. Unless there are obvious reasons why forming as an LLC would not serve your business needs, you should consider and discuss this option with your lawyer and financial advisors in advance of choosing to incorporate.
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