Rewards and Drawbacks of Forming a Corporation
There is an entire world of questions to consider before turning your business into a corporation. Seemingly simple tasks such as choosing the correct type of corporation for your company can entail a bevy of contemplation. Before diving into a difficult process, take the time to look over some pro's and con's of becoming a corporation, as well as how security like commercial liability insurance, and business insurance can put you at ease while forming a corporation.
Choose the Right Type of Corporation
A common misconception is that only certain types of businesses can incorporate. This is simply not a true statement. Any business owner, from the smallest to largest, can reap the benefits of becoming a corporation. However, the type of corporation that your business will become should be carefully measured. There are many types of corporations, and each separate one may have benefits that are more suited for your business.
A general corporation is the most common type. Owned by stockholders, this type of corporation is legally a completely 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 paperwork from a legal standpoint that must be done vigilantly and on time, as well as an increase in regulations and rules by the state.
The S Corporation is one designed especially for tax purposes, and has become very popular among small business owners and certain sole proprietors. The difference from general and close corporations is that they pay taxes on profit that the business makes as well as personal taxes on dividends profited and any salaries and such that have been paid out. S Corporations evade the 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, there is also an assortment of restrictions that must be looked over carefully. Filing to become an S Corporation can also be a difficult task as well. Certain regulations must be met and abided by in order to even qualify to become an S Corporation. In certain instances it is recommended to obtain assistance from an attorney for more complicated matters.
Close Corporations are for the most part very similar to a general corporation, but differ in that they are limited to the number of stockholders in the corporation. Many times 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 LLC, or limited liability company, is one other form of a corporation. This form combines the benefits of a partnership along with a corporation. The tax benefits of the S corporation come into play while maintaining the liability security that a partnership offers owners personal property from any debt. Therefore it has become very popular among small businesses and sole proprietors.
Benefits of Becoming a Corporation
There are a plethora of benefits that can come from incorporating your business. Though there are advantages particular to different types of corporations, there are also main benefits that they all offer.
One of the biggest advantages offered by incorporating is that of limited liability. Since legally the corporation is a separate entity, all business owners and shareholders are limited in responsibility for any debts that the company holds. Thus, personal property of the shareholders can not be seized to settle debt with creditors of the business.
Structure of a corporation can also be a big advantage. The officers of the corporation such as the vice president, treasurer, and CEO are put in position by the board of directors, who is in turn elected by the shareholders or owners of the company. Therefore, a set structure comes into play of who does what and when which keeps any problems or situations dealt with quickly.
Tax benefits are also a major reason for a business to incorporate. Dependent 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, as explained somewhat above, if you form an S Corporation or LLC, 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 as well which offer beneficial retirement options that non-incorporated companies could not. This along with stock options and other benefits make the company more attractive to potential employees which bring in more experienced personnel.
Higher profits are another advantage to incorporating as the amount of capital from investors allows for a bigger and broader reach. Therefore, expanding the corporation into different endeavors is a high 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.
Drawbacks to Incorporating
Though the benefits of incorporating are numerous, there can also be a variety of drawbacks that must be weighed. The first chief drawback is the money it costs to incorporate. Fee's can get expensive for a corporation and include:
- Tax prepayment for first year franchises
- Government filing costs
- Filing your Articles of Incorporation through the Secretary of State
- On occasion hiring an attorney might be beneficial for the initial start up of your corporation
When owning a C Corporation there is also the disadvantage of double taxation. Again this is the idea that 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 through utilization of an S Corporation or LLC.
Another huge weakness that comes with a corporation is the extensive reports and paperwork in general that must be done constantly. Records of every move must be kept vigilantly, 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 somewhat of a drawback if guidelines are not followed strictly.
How Commercial Liability Insurance Helps
Although there are many liability benefits when forming a corporation it is still recommend 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 asses 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 gaining the assurance that you are protected against such claims as of bodily injury, or property damage. Some types of commercial liability insurance or business insurance you might want to consider are:
- A BOP - This general commercial liability insurance package will cover general liability for any claims of injury, as well property damage, and business interruption which protects the profits you would have made while recovering from disaster.
- Professional Liability Insurance - This type of business insurance protects you from expensive litigation that could occur due to negligence or inadequacy.
- Automatic Additional Insured - As another type of business insurance this is coverage that is automatically provided when it's obligatory by contract.
- Employment Practices Liability Insurance - This particular insurance protects you from any claims an employee might have about improper treatment at the work place.
- Umbrella Insurance - Umbrella insurance is a type of commercial liability insurance that covers you when your other liability insurance has reached its given limit.
- Product Liability Insurance - When a product you've made causes harm to someone or their property then this type of insurance will cover them. This type of coverage is especially important for businesses in food, or toys which regularly have such problems.
- Commercial Automobile Insurance - As a corporation it is very possible that you will have a vehicle or vehicles that are used for business. Commercial auto insurance will provide insurance for you and your employees when using the business vehicle.
Insurance has become a necessity for not only owning a corporation, but any type of business. One small instance of a lawsuit could set business back for years. Therefore, commercial liability insurance and general business insurance should be taken into high consideration when running any company. Not only will it ease your mind for starting up a corporation, but it will allow your business to grow even more.
Incorporate or Not
The considerations when deciding to incorporate can be mind numbing. If you decide to make your business into a corporation then 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 expertise of the firm will help you through one of the biggest moments for your small business.
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