The Benefits of Incorporating a Business

Incorporating your business offers numerous advantages, including limited liability for asset protection, the creation of a distinct corporate identity, the perpetual existence of the company (lasts a lifetime into future generations), transferability of ownership, the ability to establish credit and raise capital, flexibility with the number of business owners, and potential tax savings.

Let's look at each of these in more detail.

Asset Protection Through Limited Liability 

For Example: Consider Judy's Child Care Inc., possessing $5,000 in corporate assets such as cash and day care equipment. A pandemic hits and business comes to a halt with 12 months of remaining lease payments, proper formation and execution by "Judy's Child Care Inc." shield the shareholders or owners from liability beyond the $5,000 corporate assets ( cash and day care equipment). This ensures that any outstanding lease payments are typically the responsibility of the corporation rather than the shareholders. 

In contrast, a sole proprietor (or partner in a Partnership) bears personal liability for ALL business obligations. This means that if the business owner opts not to incorporate or establish a Limited Liability Company (LLC), their personal assets, including homes, cars, savings, and investments, may be at risk to settle debts or judgments. However, it's important to note that the benefits of incorporating may be compromised in cases of fraud, neglect of corporate formalities, or asset commingling.

For robust asset protection and to evade personal liability, it is advisable for most business owners to pursue business incorporation. A well-managed C Corporation or LLC effectively limits shareholders' liability to the extent of their investment in the company. 

Creation of a Distinct Corporate Identity

An incorporated business is treated as its own legal entity. It can enter contracts, own property, sue, and be sued in its own name. This gives your company a professional image and credibility with customers, lenders, and vendors.

Perpetual Existence

Unlike a sole proprietorship or partnership that ends when the owner leaves or passes away, a corporation can continue indefinitely. This means the business can last for generations, making it easier to pass down to heirs or sell.

Transferability of Ownership

Shares of stock represent ownership in a corporation. These can be easily transferred (sold, gifted, or inherited), allowing for smoother succession planning and flexibility if an owner wants to leave the business.

Ability to Establish Credit and Raise Capital

Corporations often find it easier to raise money because they can issue stock, attract investors, and build corporate credit separate from personal credit. Lenders also tend to view corporations as more stable and reliable borrowers.

Flexibility with the Number of Business Owners

Incorporation allows for a single owner (like an S-Corp or closely held corporation) or many owners (like a C-Corp with numerous shareholders). This flexibility makes it suitable for both small businesses and large enterprises.

Potential Tax Savings

Depending on the structure (S-Corp, C-Corp, LLC taxed as a corporation), you may benefit from tax advantages such as income splitting, deductible benefits (like health insurance), and possible lower overall tax rates compared to being taxed as a sole proprietor.

It's important to understand that each state has their own standards. 

Unsure of what structure is best for you? Refer to the site below hosted by the IRS for additional information.

https://www.irs.gov/businesses/small-businesses-self-employed/business-structures