Should I Incorporate?

On: March 29, 2019

It depends (am I an attorney, or what?). Corporations exist to protect the owner(s) from legal liability. If your business can be sued, it is a good idea to incorporate. This includes just about anyone whose business entails any form of risk. A corporation also is helpful is distinguishing your business from your person for purpose of revenues, business expenses, bank accounts, assets and liabilities. With a corporation, all of these exist, but distinct and separate from you. As an individual, you do not see income until the corporation has finished balancing the business’ books and then pays you. Finally, some professions, such as attorneys, do not benefit from the liability protection a corporation has to offer. On the downside, a corporation adds an extra level of complexity to your business’ administration. A corporation must be separately maintained. It will have its own EIN, revenues, bank accounts, liabilities, expenses and tax returns. To work properly, a corporation’s books and existence must be maintained totally separately from the owners’. In addition, corporate administration requires that a separate set of corporate records be maintained in the corporate “book”, such as corporate articles/certificates, minutes, bylaws, permits, licenses and corporate ownership records. Many folks find it just plain easier to function as a sole proprietor. Finally, the taxation pitfall: DOUBLE TAXATION. A regular C-Corporation makes money, files a tax return at the end of the year and pays its taxes. Any money paid to you is treated a dividend paid to the owner of the corporation. It is NOT treated as an expense. That dividend is treated by you as personal income, you file a tax return and pay taxes on THAT. This is the double taxation issue. Also to be considered:

2. C-Corporations are allowed to retain earnings, allowing them to grow into larger entities. This is helpful when raising additional capital for expansion and growth. It should be noted that all public companies (those you see on the stock exchanges) are C-Corporations.
3. There are a series of “pass-through” corporate entities that allow the tax issues to pass through directly to the individual shareholder/member. These are called S-Corporations, LLCs and other names depending on the state you reside in and/or do business in. These “pass-through” entities are limited in the amount of earnings they are allowed to retain. This limits their growth potential.