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The Benefits of Business Incorporation

Updated on November 14, 2017
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Sarath Cp, an Internet Marketing Consultant based in Cochin, India. Join me at twitter - @sarathcp92

To start off the discussion on the benefits of incorporation, we should look at what incorporation is.

What is incorporation?

According to Black’s Law Dictionary, incorporation is the act or process of forming or creating a corporation. The law treats a corporation as a person – a separate legal body from its owners - with its own rights and obligations. What was once a sole proprietorship has become a legally recognized company that is separate from you,its owner. A corporation can do things like can buy and sell property, give somebody a loan, borrow money, and employ people.

While incorporation is not for every business, for many it can mean the difference between success and failure. The major attractions of incorporation are the protection it provides to you and your shareholders on a personal asset level, as well as the many tax benefits you can capitalize on.

Why should I incorporate?

The legal advantages of incorporation lay out a very strong case in favor going through the process.

1. Protect your personal assets

This is one of the most common reasons for incorporating. As an owner of a sole proprietorship, you face legal liability for business and personal assets as creditors can go after these assets to pay business debts. On the other hand, because a corporation is a separate legal body, it is responsible for its own debts. When a corporation is properly established, you can’t be held liable for more than you have invested in the corporation – your personal assets are safe. If you have invested $50 in your corporation, you can’t lose more than that $50. Also, if you are personally bankrupt, anything owned by your corporation will remain untouched. Essentially, you may conduct your business knowing that your car, house, boat, other personal property is not at risk.

2. It lends credibility

Taking the step from sole proprietorship to corporation makes a statement that you’re serious about your business. With the creation of this professional identity, your business gathers legitimacy and authority. It is frequently the case that clients or customers prefer to conduct business with an incorporated company that is legally established and registered. It may also attract potential investors who appreciate the more permanent and reputable air corporation brings to a business.

3. Easy to transfer ownership

Ownership in a corporation can readily be transferred, sold or given away. Also, if the owner of the corporation dies, the legal structure remains the same. Should this occur in a proprietorship or partnership, property must be re-titled which is costly and involves pile of paperwork.

4. Manage retirement funds through the corporation

Retirement funds and contribution plans can be easier to set up for incorporated companies and when you retire, your funds may be left to grow within the corporation. You would receive any earnings paid out as dividends.

5. Tax benefits

Benefit deductions - As the owner of an incorporated business, you will be taxed only on your salary, bonuses and dividend payments. To reduce the taxes on these profits, you are allowed to deduct “fringe benefits” – business and operating expenses, marketing, travel expenses and so on. If you’re incorporated, medical insurance premiums are 100& deductible.

If you’re self-employed you’ll be taxed 15% of your income earned for Social Security. However, as the owner of an incorporated business, you won’t be taxed on your entire business income, only on what you take as a salary, allowing you to make considerable savings.

6. Stocks and funds

If you want your business to grow, you’ll need to be able to raise capital. An important advantage of incorporation is being able to raise this investment capital more easily. Because you have limited liability and stocks are easily transferable, your business will become more attractive to investors. Banks are also more likely to lend money to a corporation than to an unincorporated business. On a side note, if you set up a structure which allows employees to own shares in the company, this appealing benefit encourages employees to stick with you.

7. Your corporation can last forever

A corporation can literally endure forever. Even if the owner or principle member died, the corporation would continue without change. Unless the corporation went bankrupt, the shareholders would have to actively intervene to alter the course of the corporation by, for example, merging it with another business. The same holds for a partner leaving the business or when changes in management occur.

In a sole proprietor should you pass away, your business would simply dissolve and the business property and income would go into the estate where they would be available for creditors.

8. Credit rating stays strong

As a legal body, a corporation can develop its own credit rating. Your corporation can apply for a credit card, use it and build a separate credit history. This is invaluable if it happens that you experience personal financial difficulties – your credit record will not harm your corporation’s credit rating. Similarly, your personal credit standing won’t be ruined if your business fails.

While incorporation is not for every business, for many it can mean the difference between success and failure. The major attractions of incorporation are the protection it provides to you and your shareholders on a personal asset level, as well as the many tax benefits you can capitalize on.

© 2017 Sarath C P

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    • Crowdinvest profile image

      Crowdinvest 

      9 months ago from 3 Queen Street, Mayfair, London, England W1J 5PA, United Kingdom

      A very good read and helpful for startups

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