Incorporating a business is an important step for any company. Your decision to incorporate will depend on your specific situation, needs, and future plans for your business.
Before you incorporate, it’s important to understand the legal and financial impact it will have on your business. Listed below are the most common advantages and disadvantages to forming a corporation.
Advantages of Incorporating a Business
- Operate as a distinct legal entity.
- Limit the liability of shareholders.
- Candidate for debt and equity financing: banks will often lend to a corporation because it is a less risky form of investment compared to other business types. Investors may also be interested in becoming involved because corporations can impart equity to investors (equity financing).
A corporation can be private or go public. Publicly owned companies have shares owned by the public, which can be traded on the stock market.
- Professional and credible: once your business is recognized as a corporation, it earns a professional reputation, which can lead to increased business deals and growth.
- Long-term stability: unlike a sole-proprietorship or partnership, a corporation exists until it is dissolved.
Drawbacks of Incorporating a Business
- Paperwork and recordkeeping: there is a fair amount of initial paperwork involved with forming a corporation, and once it has been established, corporations must keep diligent corporate and financial records as per federal law requirements.
- Fees: there are fees for incorporating and maintaining your business.
- Taxation: a corporation is taxed once on its income, and a second time on the shareholder receiving dividends. Also, a business owner cannot claim personal tax credits.
- Complex structure: although a corporation is its own entity, it still requires individuals to carry out its day-to-day operations. For this reason, it should have a share structure in place, naming shareholders, directors, and officers and their responsibilities.