The benefits of incorporating yourself include giving you increased protection over your personal assets, easier access to capital, giving your business more credibility, more anonymity, tax advantages, existing into perpetuity access to more affordable health insurance, and having a lower risk of being audited after incorporation.
Personal Asset Protection
Setting up as a corporation is considered one of the most ideal ways to protect personal assets. The corporation becomes a separate entity and holds responsibility for the debts it incurs. Corporations have the ability to own property, engage in business activities, and can both sue and be sued. A corporation’s creditors typically have the right to pursue payment from the corporation’s assets, while protecting the assets that are personally held by:
This level of protection lets the corporation’s owners do business with no risk of losing personal property like:
- Their homes
- Their vehicles
- Personal savings
- Other types of personal property
This differs from the experience of sole proprietors and business partners who are exposed to the risk of unlimited liability on both the personal assets they possess and the business assets involved.
Ease of Accessing Capital
Corporations are able to issue stock shares to raise capital, which makes it easier for corporations to raise capital. This gives the business the chance to grow more quickly. In many cases, incorporating also makes it easier to get a bank loan. As a rule, a lender prefers to issue loans and other forms of credit to corporations over making loans to unincorporated business endeavors. A wider variety of alternative funding sources are available to corporations, making it easier for them to pay off debt.
A More Credible Business
Forming a corporation provides benefits that go beyond the financial arena. Entities dealing with corporations often view them as more reliable and stable than business entities that haven’t been incorporated. The Inc. designation and the title Corp. after the name of a company suggests to outsiders that the business is a permanent fixture that has earned credibility and is a stable part of the community. The Inc. and Corp. designations also show that you’re committed to the continued success of your business endeavor.
The Advantage of Anonymity In Business
Business owners who incorporate get a level of anonymity from the corporation. For example, if you want to be part of a business without others in the community being aware of your involvement with it, incorporating can give you some separation from the business.
Tax Advantages From Incorporating
There are several tax advantages when forming a corporation, but it’s advisable to speak with a tax professional to make sure what advantages you’ll see before forming a corporation.
- S-corporations have fewer than 100 shareholders and owners pay income tax based on the owner’s share of the entity’s corporation income at the owner’s personal taxation rate. Business losses in a corporation can be used to offset other income. The S-corporation as an entity usually doesn’t have to pay any income taxes.
- C-corporations pay a flat tax rate of 35-percent, putting an increased focus on using caution when selecting the type of corporation formed.
- Small business retirement plans can create a way for a bigger percentage of the corporation’s income to be deferred at tax time. This provides the opportunity to build a bigger retirement fund through larger contributions, and that means less of the corporation’s income is taxable.
A Corporation Exists Into Perpetuity
As a business structure, a corporation is a mode that lasts the longest. An incorporated business has the potential to exist indefinitely. Individual players in the organization might leave the corporation, but it continues to exist. Incorporating cuts the potential legal pitfalls that can break other business structures.
Lower Health Insurance Premiums
Corporations have access to discounted medical insurance and dental plans. This helps owners reduce costs on this important expense. Medical reimbursement plans may also be an option for any health care expenses that aren’t covered by an insurance plan.
Lower Risk of Being Audited
Schedule C income tax filers, who are self-employed taxpayers, face one of the highest risks of being audited by the IRS. This is because the IRS suspects self-employed people report incomes lower than actually earned and claim deductions that weren’t earned. Incorporation reduces the chance the IRS will select your return for an audit.