What are the advantages of corporations over the other forms of businesses?

Whether you are just starting your business or you have already been operating as a sole proprietorship or general partnership, you may be wondering about the benefits of forming your business as a corporation. Often, business owners think that incorporation is too costly or too time-consuming, and neither is the case.

The benefits entrepreneurs gain by forming their business as a corporation typically outweigh any perceived disadvantages. These benefits are, in many cases, unavailable to sole proprietorships and general partnerships.

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Incorporation benefits include:

• Limited Liability – Corporations provide limited liability protection to their owners (who are called shareholders). Typically, the owners are not personally responsible for the debts and liabilities of the business; thus, creditors cannot pursue owners’ personal assets, such as a house or car, to pay business debts. Conversely, in a sole proprietorship or general partnership, owners and the business are legally considered the same and personal assets can be used to pay business debts.
• Tax Advantages – Corporations often gain tax advantages, such as the deductibility of health insurance premiums paid on behalf of an owner-employee; savings on self-employment taxes, as corporate income is not subject to Social Security, Workers Compensation and Medicare taxes; and the deductibility of other expenses such as life insurance. For information on the types of tax advantages your business may gain by forming as a corporation, consult an accountant or tax advisor.
• Establishing Credibility – Incorporating may help a new business establish credibility with potential customers, employees, vendors and partners.
• Unlimited Life – A corporation’s life is not dependent upon its owners. A corporation possesses the feature of unlimited life, meaning if an owner dies or wishes to sell his or her interest, the corporation will continue to exist and do business.
• Transferability of Ownership – Ownership in a corporation is typically easily transferable. (However, there are restrictions on S corporation ownership).
• Raising Capital – Capital can be raised more easily through the sale of stock. Additionally, many banks, when providing a small business loan, want the borrower to be an incorporated business.
• Retirement plans – Retirement funds and qualified retirements plans, such as a 401(k), may be established more easily.

Corporations do not come without perceived potential disadvantages.

Related: Should You Change Your Sole Prop to a Corporation?

Potential disadvantages of a corporation include:

• Double Taxation – C corporations are subject to double taxation of corporate profits when corporate income is distributed to the owners in the form of dividends. The double tax is created when tax is first paid at the corporate level. If corporate profit is then distributed to owners as dividends, the owners pay tax at the individual level on that income. The double tax can be avoided by electing S corporation tax status with the Internal Revenue Service.
• Formation and Ongoing Expenses – To form a corporation, articles of incorporation must be filed with the state and the applicable state filing fees paid. Many states impose ongoing fees on corporations, such as annual report and/or franchise tax fees. While these fees often are not very expensive for small businesses, formation of a corporation is more expensive than for a sole proprietorship or general partnership, both of which are not required to file formation documents with the state.
• Corporate formalities – Corporations are required to follow both initial and annual record-keeping tasks, such as holding and properly documenting initial and annual meetings of directors and shareholders, adopting and maintaining bylaws and issuing shares of stock to the owners. Sole proprietorships, general partnerships and even LLCs do not incur the formalities imposed on corporations.

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Related: 3 Dangers of an Unincorporated Business (and How Incorporation Can Resolve These Problems)

For specific questions on whether the corporation is the best structure for your business, it is best to seek the advice of an attorney or accountant.

What does it mean to incorporate your business?

When you incorporate your business, you are forming a legal entity that exists independently of its owner(s), also known as shareholders.

An incorporated company, individual, or organization can engage in business, enter contracts, own property, and more. But incorporating your business also brings with it legal obligations such as tax filings and annual reports.

To incorporate your business, you must file “articles of incorporation” with a state agency. These articles or formation documents include information about your business purpose, location, and shares and stock issued (if any).

What are the advantages of forming a corporation?

There are many advantages to incorporating to both the business and the owners. Forming a corporation allows you to:

• Secure your assets. One of the main advantages* that corporations have is that the owners enjoy limited liability protection and are typically not personally responsible for business debts. This means that creditors can’t pursue your home or car to pay business debts.
  
  *LLCs also provide limited liability protection; sole proprietorships and partnerships do not provide any liability protection.
  
  
• Gain tax breaks. Another benefit to incorporation is that corporations often gain tax advantages and can write off items such as health insurance premiums, savings on self-employment taxes, and life insurance. If the corporate tax rate is lower than the personal rate and/or your corporation does not distribute income to shareholders, you may also realize additional tax savings.
  
  
• Grow your corporation for now — and the future. Incorporating bolsters credibility and may help you reach potential new customers and partners. And while you can’t live forever — your corporation can. Even if an owner dies or sells interest, the corporation still exists.
  
  
• Easy transfer and faster funds. Corporation ownership can be easily transferable (with some restrictions on S corporations). Capital can be raised more easily through the sale of stock. Another incorporation advantage is that many banks prefer handling loans with incorporated borrowers.
  
  
• Ready for retirement. Retirement funds and qualified plans, like a 401(k), can be easier to establish.
  
  
• Gain anonymity. If you don’t want your involvement with a small business to be public knowledge, your best choice may be to incorporate.

What are the disadvantages of incorporating your business?

Corporations do have some potential disadvantages, including:

• Double taxation. When corporate profits are distributed as dividends, C corporations are subject to double taxation. Corporations are liable for reporting and taxing business profits first. Any remaining profits distributed to shareholders in the form of dividends must be reported as personal income by shareholders and taxed accordingly. The IRS allows companies to elect S corporation tax status to avoid this disadvantage.
  
  
• Ongoing fees. You must file articles of incorporation with the state which comes with varying fees depending on the state. Many states impose ongoing fees — which are steeper for a corporation than for a sole proprietorship or general partnership.
  
  
• More record keeping. Corporations must follow initial and annual record-keeping requirements—which sole proprietorships, general partnerships and limited liability companies (LLCs) avoid.

Choosing a business structure

Your choice of business structure can impact everything from daily operations to taxes and risk exposure of your personal assets.

Once you’ve chosen a structure, you must also address unique formation, management, and compliance requirements to be met.

It’s a good idea to consult with a professional, such as a small business counselor, tax advisor, attorney, and accountant. You can also use this BizFilings Incorporation Wizard Tool to see which business type is right for you.

For more information, read: Comparing company types: Understanding C Corp, S Corp, LLC and DBA business structures.

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