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Why Incorporate?
The primary purpose of a corporation is to separate the owner of a corporation from the corporation itself. It can hold title to property, it can borrow money, it can enter into contracts, it can sue or be sued, and enjoys constitutional rights and protections similar to those of an individual.
Incorporation can be a complicated process, and can't easily be undone. So it's important to carefully weigh the following advantages and disadvantages before you make a decision.
Advantages
- Limited Liability: A corporation is considered a separate legal entity, which means the shareholders and the corporation are not viewed as the same entity in the eyes of the law. This means that the personal assets of shareholders are not at risk for satisfying the corporation's debts or liabilities. Just like how your personal assets would not be at risk if your neighbour defaulted on his mortgage. You are viewed as two separate and distinct legal entities.
- Tax Treatment: Since a corporation is a separate legal entity, it pays taxes separately from its shareholders (at least in the typical C corporation). The shareholders of a corporation only pay taxes on corporate profits paid to them in the form of salaries, bonuses, and dividends. The corporation then pays taxes on any profits (which is usually taxed at a lower rate than personal income).
- Raising Capital: Sale of stock to investors for the purposes of raising capital is generally the preferred method of financing by investors. Also, a corporation can issue Bonds to raise capital for expenditures without selling shares or stock options.
- Employee Stock Options: The stock structure of a corporation allows management to offer stock options to employees in order to attract and retain the best talent possible.
- Shareholder/Employee: A shareholder of the corporation can also be an employee of that same corporation, thereby becoming eligible for reimbursement or deduction of many types of expenses, including health and life insurance.
- Defined Operational Structure: Corporations have a set corporate structure. Shareholders are the owners, who then elect a Board of Directors, who then elects the officers (ex. CEO, CFO, CTO, etc). The only real role played by shareholders in the operation of a business is to elect the board of directors.
- Perpetual Existence: A corporation continues to exist until the shareholders vote to dissolve it, it merges with another business, or it fails to file the necessary regulatory documents.
- Transferable Shares: Shares of a corporation are generally freely transferable, which means that its existence is not dependent on who the shareholders may be. A corporation continues to exist, even if shareholders die, or sell their shares. In some cases, securities law may restrict the transfer of shares.
Disadvantages
- Fees: There are fees associated with incorporating a company, and also with maintaining that corporation.
- Paperwork: A corporation requires more paperwork than non-corporations, including preparing financial statements, tax returns, business bank accounts, keeping records of corporate actions (like annual general meetings), and maintaining licenses.
- Disclosure of Corporate Officers and Directors: Most states do not require that names of shareholders be part of the public record. However, many states do require the names and addresses of officers and directors be listed on documents filed with the Secretary of State.
- Dissolution: Dissolving a company can be a complex and time-consuming affair.
- Tax Consequences: C corporations have potential double tax consequences (company profit and dividends). S corporations can mitigate this tax issue.
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