Updated: Dec 15, 2021
If you're a sole proprietor, you have probably wondered at some point whether you'd be better off if you incorporated your business. Here are some facts for you to consider.
The single biggest benefit of incorporating a business is limiting an owner's liability. In theory, a stockholder in a corporation risks only his or her investment in the corporation stock. A lawsuit against the company generally cannot be satisfied by attaching the stockholder's personal assets. In practice, most small corporation stockholders must personally guarantee bank loans for their corporations. Thus, if the corporation fails, the stockholder's personal assets are at risk. In addition, where personal services are involved, the individual performing the services may be personally liable for his or her actions even though the business is incorporated.
The second advantage of operating as a corporation is that it may be easier to raise capital because the business can do so by issuing stock and selling bonds.
A third advantage is that ownership interest in a corporation is easier to transfer than in a sole proprietorship.
A corporation files its own tax return and pays its own income tax. Therein lies the major drawback to the corporate form: business profits may be taxed twice - once at the corporate level and again at the shareholder level when paid out as dividends or liquidating distributions. Double taxation can generally be avoided by electing S corporation or LLC status.
The corporate form does allow for more fringe benefits that are deductible by the corporation and tax-free to employees, including an owner-employee.
No business owner should incorporate without carefully considering the pros and cons of doing so.