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There are many questions to consider before turning your business into a corporation.
Seemingly simple tasks, such as choosing the correct type of corporation for your
company, require extensive contemplation. Before diving into a difficult process,
take the time to look over some pros and cons of incorporation, as well as how commercial
liability and business insurance can put you at ease while forming a corporation.
A common misconception is that only certain types of businesses can incorporate.
This is simply not true. Any business, from the smallest to the largest, can reap
the benefits of becoming a corporation. However, deciding which type of corporation
best suits your business requires careful measurement. There are many types of corporations,
and one may have benefits that are better suited to your business.
A general corporation is the most common type. Owned by stockholders, this type
of corporation is legally a separate entity, and stockholders are limited in liability
to only the investment they've put into the corporation. Some benefits include tax
exemption for particulars, protection of owners' personal property, and a general
increase in capital due to the sale of bonds and stocks. Disadvantages include more
legal paperwork that must be done vigilantly and on time, as well as an increase
in regulations and rules by the state.
The S corporation or "S corp" is designed for tax advantages, and has become
very popular among small-business owners and certain sole proprietors. S Corporations
differ from general and close corporations in that they pay taxes on profit that
the business makes, as well as personal taxes on dividends profited, and any salaries
paid out. S corporations evade double taxation by allowing only one tax report to
be filed from personal shareholders of the business. Although this evasion of double
taxation is very beneficial, restrictions must be examined carefully. Filing to
become an S Corporation can be a difficult task. Certain regulations must be met
and abided by to qualify to become an S Corporation. It is best to obtain assistance
from an attorney for more complicated matters.
A close corporation is similar to a general corporation, but is limited to the number
of stockholders in the corporation. Often, the number of stockholders is no more
than 50. The close corporation is also required to offer shares of the company first
to current stockholders before selling to new ones, meaning that stockholders do
not change significantly for long periods of time. This is perfect for a group of
associates who only want to be involved at the minimal level, while others are highly
involved in the everyday decision-making processes.
An L.L.C., or limited liability company, is one other form of corporation.
This form combines the benefits of a partnership with a corporation. The tax benefits
of the S corporation come into play, while maintaining the liability security that
a partnership offers its owners: protection of personal property from any debt.
Therefore, the L.L.C. has become very popular among small businesses and sole proprietors.
Though each type of corporation has its own advantages, all corporations offer the
same main benefits.
One of the biggest advantages of incorporating is limited liability. Because
legally a corporation is a separate entity, all business owners and shareholders
are limited in responsibility for any debts that the company holds. Thus, the shareholders’
personal property cannot be seized to settle debt with creditors of the business.
A corporation’s structure can also be a big advantage. The corporation’s
officers, such as the vice president, treasurer and chief executive officer, are
put in position by the board of directors, who are in turn elected by the shareholders
or owners of the company. Therefore, a set structure determines who does what and
when, resulting in the quick resolution of any problems.
Tax benefits are also a major reason for a business to incorporate. Depending on
the type of corporation, as a separate legal entity, the corporation will pay taxes
independently from the shareholders, and shareholders will only be taxed on any
income given to them in dividends, salaries or bonuses. However, if you form an
S corporation or L.L.C., you are then able to avoid “double taxation.”
This means that only one report on earnings will be filed on your personal tax report,
and profits will only be taxed once.
Corporate health care plans can be developed, offering beneficial retirement options
that non-incorporated companies could not provide. This, along with stock options
and other benefits, make the company more attractive to potential employees, which
brings in more experienced personnel.
Higher profits are another advantage to incorporating, as capital from investors
allows for a bigger and broader reach. Therefore, expanding the corporation into
different endeavors is a good possibility.
The idea of perpetual existence can also be attractive to those looking to incorporate.
This is the concept that the corporation will maintain its existence until all shareholders
decide to liquefy assets or create a merger with another company. Therefore, if
one owner sells out or passes away, the company will continue.
Though the benefits of incorporating are numerous, a variety of drawbacks must also
be weighed. The first big drawback is the cost of incorporation. Fees can be high,
With a C corporation, there is also the disadvantage of double taxation. The corporation
is taxed for profits made, and you are personally taxed for profits paid to you
by the corporation. However, as explained above, this is avoided with an S corporation
Another disadvantage to a corporation is the extensive reports and paperwork that
must be done constantly. Records of every move must be vigilantly kept, and such
things as tax returns filed efficiently and on time. Paperwork can become costly,
as people must be hired to keep track of records, organize and file on time.
The rules and regulations that come with forming a corporation must be abided by
as well, or the benefits will be revoked. Policy regarding corporations is extensive
and must be paid respect. Therefore, it can be a drawback if guidelines are not
Although there are many liability benefits when forming a corporation, it is still
recommended that the owners obtain some sort of commercial liability insurance or
business insurance. Though the personal property of the shareholders in a corporation
is less liable for any accidents, the company is still responsible. Therefore, it
is important to assess the types of risk that your corporation could be subject
to, and purchase the proper insurance accordingly. Having the right insurance for
your company will ease any difficulties in forming the corporation by ensuring that
you are protected against such claims as bodily injury or property damage.
Some types of commercial liability insurance or business insurance
to consider are:
If you own a corporation – or any type of business – insurance is a
necessity. One small lawsuit could set business back for years. Therefore, commercial
liability insurance and
general business insurance should be taken into consideration when running
any company. Not only will it ease your mind when starting up a corporation, it
will allow your business to grow even more.
When deciding to incorporate, the considerations can be mind-numbing. If you decide
to make your business into a corporation, build a business insurance plan that will help you through
the process. Ensure that your corporation and personal assets will be safe from
creditors by consulting with a professional commercial liability insurance firm.
The firm’s expertise will help you through one of the biggest moments for
your small business.
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