Owning a small business can be a risky venture. One way to limit your personal liability is by incorporating your business, reports the California Society of CPAs (www.calcpa.org). While incorporation requires more paperwork and expense than a sole proprietorship or a partnership, it offers important legal and tax advantages. Show
1. Protect Your Personal AssetsIncorporating your business is one of the best ways you can protect your personal assets. A corporation can own property, carry on business, incur liabilities, and sue or be sued. As a separate legal entity, a corporation is responsible for its own debts. That means creditors of a corporation generally can seek payment only from the assets of the corporation -- and not from the personal assets of shareholders, directors and officers. In effect, that means business owners can conduct business without risking their homes, cars, savings, or other personal property. Owners of a sole proprietorship or partnership, on the other hand, face unlimited liability for both business and personal assets. 2. Have Easier Access to CapitalRaising capital is generally easier for a corporation, since a corporation can issue shares of stock. This may make it easier for your business to grow and develop. If you’re in the market for a bank loan, that’s another reason to incorporate. In most cases, banks would rather lend money to corporations than to unincorporated business ventures. Corporations generally have access to more alternative sources of capital through which they can pay off their debts. 3. Enhance Your Business’ CredibilityThe benefits of incorporating go beyond finances. Suppliers, customers and business associates often perceive corporations as being more stable than unincorporated businesses. In a sense, having “Inc.” or “Corp.” after your business name conveys permanence, credibility, and stability, and communicates your commitment to the ongoing success of your business venture. 4. Perpetual ExistenceCorporations are the most enduring legal business structure. A corporation can continue indefinitely, regardless of what happens to its individual directors, officers, managers, or shareholders. This means that by incorporating your business, you may be able to avoid the legal entanglements that could result with other business structures. 5. Gain AnonymityA corporation can offer anonymity to its owners. If you want to open a small business and don’t want your involvement to be public knowledge, your best choice may be to incorporate. 6. Other ConsiderationsAs a separate legal entity, a corporation is taxed on its profits. Those taxable profits can be reduced by qualified business expenses, including operating expenses, marketing and advertising expenses, travel and entertainment expenses, and other costs of making a profit. An incorporated business may also deduct employee salaries, health benefits, and contributions to qualified pensions and retirement plans for employees. However, the taxation of corporations is complicated; different corporate structures have different tax advantages and disadvantages. While incorporation comes with important benefits, it may not be the best form for all businesses. A CPA can help you to assess the tax and other implications of incorporating your business. Whether you are just starting your business, or have been operating as a sole proprietorship or general partnership, you may be wondering about the advantages of incorporating your business as an S corporation. Many business owners assume it will be too costly or time-consuming — but neither is the case. What is an S corporation (S corp)?A corporation is taxed for federal income tax purposes in one of two ways – as a “C corporation” or an “S corporation”. An S corporation is a corporation that is treated, for federal tax purposes, as a pass-through entity through an election made with the Internal Revenue Service (IRS). Electing “S corp” status could lead to important tax benefits. A corporation is created by filing Articles of Incorporation with the Secretary of State or a similar government body. There is no requirement to notify your state of incorporation that your corporation will be an S corporation. This is a tax matter handled by the IRS. The difference between a C corporation and an S corporation is in how they are taxed under income tax laws. The state corporation laws make no distinction. An S corporation issues stock and is governed as a corporation, with directors, officers, and shareholders who function in the same manner as their C corporation counterparts. The owners (the shareholders) have the same protection from liability as shareholders of a C corporation. An S corporation shareholder’s personal assets, such as personal bank accounts, cannot be seized to satisfy business liabilities. However, like a sole proprietorship or a partnership, an S corporation passes through most of its income, losses, and deductions to the shareholders. Unlike a C corporation, there is no "double taxation", once at the corporate level and again on the individual shareholder level. Each shareholder is subject to his or her own individual tax rate on the income (or losses) passed through to him or her. Why is it called an S corporation?The S corporation derives its name from Subchapter S of the Internal Revenue Code which provides corporations a "tax election" option — a choice on how they want to be taxed. Under Subchapter S, a company elects to pass all its profits to its shareholders directly. (The C corporation gets its name from Subchapter C of the IRC – which is the part of the tax law that corporations will be taxed under unless they make the S corporation election.) What are the requirements for an S corporation? To qualify for S corporation status, your corporation must meet the following requirements:
To become an S corporation, your corporation must submit Form 2553 Election by a Small Business Corporation signed by all the shareholders. S corporation advantages: tax benefits and moreThe advantages of an S corporation often outweigh any perceived disadvantages. The S corporation structure can be especially beneficial when it comes time to transfer ownership or discontinue the business. These advantages are typically unavailable to sole proprietorships and general partnerships. S corporation advantages include:
S corporation disadvantagesAn S corporation may have some potential disadvantages, including:
What is the difference between an S corp and a C corp?The difference between an S corporation and a C corporation is in how they are taxed under the Internal Revenue Code. A C corporation is the standard (or default) corporation under IRS rules. It is a separate taxable entity. A C corporation files its own income tax return and pays taxes on its income at the federal corporate income tax rate. All corporations are taxed as C corporations unless the corporation makes an election to be taxed as an S corporation. An S corporation is a corporation that has elected a special tax status with the IRS. An S corporation is not a separate taxable entity. It files an information return but not an income tax return. The corporation’s income, losses, and other tax items pass through to its shareholders, who pay their share of the corporation’s profits on their personal income tax return at the personal income tax rate. To learn more about the two ways a corporation’s income can be taxed read Compare S corporation vs. C corporation. Do you know about LLCs and S corp elections?To take advantage of the structural benefits of an LLC combined with the taxation benefits of an S Corp, you can establish your business entity as an LLC and then make the election to have it be treated as an S corporation by the IRS for income tax purposes. However, regardless of how an LLC is taxed (and it can be taxed in the same manner as an S corporation, C corporation, sole proprietorship, or general partnership), it is still an LLC. Its tax classification has no effect on its entity status – it’s still an LLC. Read more about LLCs electing S corp tax status. How to form an S corporationTo form an S corp, you must first form a corporation by preparing and filing Articles of Incorporation or a Certificate of Incorporation with the proper state authorities. You must also pay filing fees and any applicable initial franchise taxes or other fees. The type and amount of information required in the incorporation documents varies by state. After your Articles of Incorporation are filed, you need to file Form 2553 with the IRS to elect S corporation status for your company. With BizFilings’ Basic and Standard Incorporation Services, we will provide Form 2553 to you for you to finalize and submit to the IRS. Our Complete Incorporation Service includes an S Corporation Obtainment Service, where we interact with the IRS on your behalf to obtain S corporation status for your company. Additionally, your S corporation must hold an organizational meeting (initial meeting of directors) where you adopt bylaws and undertake other initial corporate actions (such as appointing officers and approving a resolution to open a business bank account). You should distribute stock certificates to shareholders and record these transactions in the company’s stock transfer ledger. The actions of the organizational meeting should be documented and kept along with the Articles of Incorporation and bylaws in a corporate record book. For specific questions on which business structure and tax classification are best for your particular situation, it is best to consult an attorney or accountant. Start your S corp todayBizFilings can help you quickly form an S corporation in three easy steps. Get your S corp started today and explore our flexible packages and tools for forming your business with the state, keeping your business compliant, and fulfilling additional state and federal requirements. What are two advantages of a corporation vs any form of partnership?The benefits of a close corporation as opposed to a partnership include potentially lower tax rates, limited liability, and the option to sell stock in exchange for ownership of the business to raise capital.
How do the advantages of a corporation differ from a sole proprietorship and a partnership?A corporation has the unique advantage of true separation of the owner with the business. This means that the corporation files a separate tax return from its shareholders. In contrast, there is less separation of the business from its owner in a sole proprietorship or partnership structure.
What are 3 disadvantages of a corporation?What are the Disadvantages of a Corporation?. Double taxation. Depending on the type of corporation, it may pay taxes on its income, after which shareholders pay taxes on any dividends received, so income can be taxed twice.. Excessive tax filings. ... . Independent management.. What are the advantages of corporation?Pros of forming a corporation
Shareholders have limited liability: Shareholders are normally only financially liable for the amount of their investments, which protects their personal assets. Corporations can raise funds: Publicly held corporations can sell shares and issue bonds to raise funds for the business.
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