Should I Incorporate My Company?

A corporation is a special business entity which comes with a lot of benefits and a lot of drawbacks. The decision to incorporate your company will depend on your annual turnover, the potential benefits and how these balance against the work you must do to maintain a corporation.

The central element to a corporation’s uniqueness is it is a legal entity, separate from the people that run it. The board and officers of the corporation can only be held liable for actions that they personally did or did not take – so, unlike a partnership, if someone screws up, only that person (any anyone who is proven to have had a hand in the screw-up) should have to pay.

Corporations can raise capital more easily than other forms of business, by selling stock and getting loans (which is slightly easier as a corporation). Another advantage is tax – although, for the unwary, tax benefits can become tax disadvantages. Corporations are allowed to deduct the cost of benefits for their officers (handy, considering that the officers of a corporation are, in another business structure, usually the proprietors).

Unfortunately, owners sometimes pay double tax in a corporation – once inside the business, and then again when they receive profit in the form of dividends on their shares. The tax system for corporations is also insanely complex, with plenty of loopholes for the overconfident or the unwary to trip over. Governments tend to keep a very close eye on the operations of a corporation, particularly after the disastrous fall of Enron.

Things to consider before deciding to incorporate your company are whether you have the legal, business and accounting knowledge to operate in this form of business. The process of incorporation is a sign of the complex system your company is entering into: you will need to structure your company for shares, write company by-laws, elect officers, file for an employee identification number with the IRS and sort out bank accounts before you file your corporate documentation with your state body.

Check the laws of your state to review the process. Some states have better laws in regards to corporations than others, and these will affect how advantageous the move will be. Also check with your Secretary of State office to register your corporation’s name – if your preferred name is taken you will have to find a new one. You may also have to register the name before beginning the incorporation process.

Filing your forms for incorporation can be expensive. You can choose to file the papers yourself (the cheapest option), use an incorporation service or go through a business attorney (the priciest option). While filing your own forms is cheap, it has its own hazards, unless someone in your company has experience in the process.

As you can see, incorporating is a task not for the weak of heart. Before you embark on this process, it is definitely worthwhile consulting a lawyer for clarity. Sometimes, the structure is simply not worth it. However, the significant tax benefits incorporating can bring will make all the hard work worthwhile for companies with the appropriate annual turnover.

For more info: In the US, see the office for your Secretary of State. In the UK, visit www.businesslink.gov.uk for more advice.


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