Should I Incorporate My Business?

There are many factors to consider in a decision to incorporate a new or existing business, only some of which are the tax implications.

For example, if your business involves substantial personal risk or product liability, incorporation can set up a limited "layer of protection" or shield between you and your creditors. Generally, you will still be liable for your own actions in your profession, and as a supervisor of those under you. Most professionals, such as physicians, remain liable for malpractice even if incorporated. A corporation also allows for easy continuation of a family business, by simply passing the stock to the preferred successor. These are legal considerations which should be discussed with an attorney.

Major Advantages to a Corporation:

Life of business is perpetual
Stockholders have limited liability
Transfer of ownership is easy (sale of stock)
Easy to raise capital
Shared Management
Adaptable to small and large business
Tax-free fringe benefits for owner/employees.

Major Disadvantages to a Corporation:

Double taxation. Profits are taxed at the corporate level and dividends distributed to the shareholders are taxed at the individual level (Not applicable to S-Corps 1120S's)
Corporate charter restricts types of business activities.
Subject to many federal and state controls.

For tax purposes, incorporating creates a separate taxable entity, which - in most states - will continue to exist even when the business in the corporation closes. As the incorporator and/or shareholder of the corporation, you may have responsibilities for filing federal corporation income tax returns, as well as state and sometimes local returns and reports to several different agencies. There may be an annual state tax or fee, even if the business has no income. Therefore, this responsibility should not be undertaken without knowing the implications involved.

If you incorporate, you will usually become an employee of your corporation, drawing a fair salary based on the value of your services.

[Home] [Up] [Next]

Disclaimer
We do not offer legal advice. All information provided on this website is for informational purposes only and is not a substitute for proper legal advice. If you have legal questions, we recommend that you seek the advice of legal professionals.

Tax Disclaimer: To ensure compliance with IRS Rules, any U.S. federal tax advice provided in this communication is not intended or written to be used, and it cannot be used by the recipient or any other taxpayer (i) for the purpose of avoiding tax penalties that may be imposed on the recipient or any other taxpayer under the Internal Revenue Code, or (ii) in promoting, marketing or recommending to another party a partnership or other entity, investment plan, arrangement or other transaction addressed herein.