Benefits of Incorporation. The process of incorporating can benefit a business in several ways, including providing limited liability for the owners and significant tax advantages.
Limited Liability. Limited liability is a major advantage of incorporating. A corporation is deemed to be a separate legal entity from its owners, meaning that the owner’s liability for the corporation’s debts is limited. This structure provides peace of mind for the business owners by protecting their personal assets from most types of liability from the business. If your business is not incorporated or a limited liability company, a creditor may go after your personal assets, including homes, cars, properties, securities and other assets to satisfy a claim.
Tax Advantages. A corporation can also provide significant tax advantages for its owners. For example, employment taxes may be significantly lower in a corporation than self-employment taxes paid as a sole proprietorship.
Financing. A corporate structure also improves your ability to raise capital. Investors will want to invest in a corporation because they will share the advantage of limited liability. Investing in a sole proprietorship or general partnership could result in substantial personal risk.
Other Advantages. There are other advantages to using a corporation, such as deductible health insurance costs and attractive retirement options. These same benefits may not be available for sole proprietorships or partnerships.
"S" Corporations. An “S” corporation is a corporation that is not taxed directly as a corporate entity, but shares certain tax aspects of a partnership or LLC. That is, taxes are “passed through” to the owners. In comparison, a general or “C” corporation is taxed as an entity separate from its shareholders. This results in the concept of “double taxation”, which occurs when the corporation is taxed, and then its employees and shareholders are taxed individually on their income and dividends. There are certain eligibility requirements to use an S Corp.
Limited Liability Companies. Limited liability companies (LLCs) also benefit from the limited liability aspect of corporations. However, their legal structure is fundamentally different, and the advantages and taxation considerations can vary significantly. Corporations generally are more rigidly structured than LLCs and have more formalities under the applicable corporate statutes. LLCs can provide more structural flexibility, which can result in great costs and delays in order to organize them. Also, LLCs are “passes through” tax entities, meaning that the tax aspects flow through to the LLC owners, unlike a corporation, which is generally taxed separately.
Dieter Karl Rapp, APLC
Attorney at Law 6789 Mallee Street
Carlsbad, CA 92011
Phone: (949) 309-0333
Fax: (760) 448-6171