Incorporating Your Small Business
If you are an aspiring entrepreneur and have a profitable business going, you must be aware of the advantages and disadvantages of incorporating a small business. Forming corporations are no big deal. If you are capable of running a successful business, you must be sufficiently equipped in incorporating a small business. All Sate business administrations have simplified incorporating procedures to the possible extent to help small business and actively solicit business registrations in their territory. Online resources with clear instructions for business organization are available in all states. You may consult a lawyer for drafting legal documents for forming corporation to avoid future complications.
The advantages in incorporating a small business are many. The foremost is the personal liability protection it offers. As business expands the associated risks also increases proportionately. By forming a corporation, you are creating a legal entity that has a separate existence in the eyes of Law. That entity is responsible for all its business operations and personal liability of the business owners (or share holders as they are called) is limited to their capital contribution. Your personal assets are safe from being drawn into the business. Limited Liability Companies also provide such personal liability protection. However, the business continuity and sale and purchase of business interest are moot. Generally LLC has no separate existence from that of its members unless expressly specified otherwise. Corporations are ‘perpetual’. It has a separate existence from its shareholders. Death or disability of a share holder does not affect its existence in normal course. Stocks or shares are relatively easily transferable. Due to this advantage, investors are willing to invest in corporations when compared to other business forms. So, it is easy to attract funds for expanding your business as a corporation.
There are two types of corporations. S Corp and C Corp. The basic structures of both are similar. There are certain limitations in forming an S Corp. The main difference is the tax classification. C Corporations are subject to corporate taxation. It has to file a business profit or loss return and directly pay tax on its profits if applicable. Then again when the profits are distributed among share holders, they have to declare that as income and pay tax on it. In a LLC or S Corp, the profits can pass through to the members or share holder in proportion to their stock holdings. The members or share holders can declare the same in their personal returns and pay tax. Basically C Corp profits are subject to double taxation.
