Hard Money Blog
  By Vanguard Hard Money
Should You Incorporate?

Should You Incorporate?

by Carla Palmer 22. December 2010 17:10

The decision to incorporate or not is one that faces owners of businesses large and small. Let’s examine a few pros and cons.

Owner protection from legal liability. Incorporating can limit owner liability for the corporation’s activities and debts.

  • The ability to purchase stock is attractive to many investors.
  • The corporate structuring of directors, officers and shareholders clearly defines the roles and responsibilities within the corporate organization.
  • Offering stock benefits and stock options to employees is an appealing benefit.
  • Cons

    1. The process of incorporating can be costly in both time and money.
    2. Corporations must follow established “formalities”, such as holding regular director meetings, recording all corporate activity, and maintaining the corporation’s ongoing financial independence.
    3. Profits from traditional corporations can sometimes be “double taxed”. The corporation itself is taxed for any profits earned, and individual stockholders who earned profits (by way of dividends) are also taxed. This may not be an issue for smaller corporations, whose owners often draw salaries instead of dividends; salaries are tax-deductible for the corporation. One solution to the “double tax” situation is choosing the “S” corporation tax status.

    “S” CorporationsIn general,”S” corporations do not pay federal income taxes. Instead, the corporation's income or losses are passed through to its shareholders, who must report the income or loss on their individual income tax returns. This concept is called single taxation.Thus, company losses can offset personal income made from other sources. In addition, “S” Corporation shareholders are not subject to self-employment taxes.But qualification as an “S” Corporation depends on meeting strict structure and reporting requirements. Also, “S” Corporations cannot deduct the cost of benefits for employees/shareholders who hold more than 2% ownership.
    NOTE: Always research the laws for your state, and consult a tax attorney, before establishing any business structure.

    In my next blog, I’ll discuss LLCs.

    - Carla Palmer



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