The importance of incorporation usually has to do with the advantages that come with incorporating a business, such as personal asset protection, tax benefits, and opportunities for raising capital.

Advantages of Incorporation: Tax Benefits and Liability Protection

Corporations offer their owners (shareholders) personal asset protection because these companies exist as separate entities from their owners. This protection is one of the most important reasons to incorporate.

Owners who operate unincorporated businesses don't have this personal liability protection. Creditors can come after the owners' residence and personal finances to satisfy debts, in these instances.

Owners of corporations, however, can conduct business without risking their personal property, such as the following:

  • Savings.
  • Vehicles.
  • Homes.
  • Other personal assets.

Incorporating a business creates a protective bubble around a corporation's shareholders and directors. This “bubble” is often called the “corporate veil.“ As such, corporations can take the types of risks that make growth possible without exposing directors and shareholders to personal financial liability beyond their original investment in the business.

Corporations are taxed differently than other business structures and individuals. Wealthy individual taxpayers may fall into a higher tax bracket than some corporations, which are taxed at a corporate rate. Therefore, it's sometimes more cost-effective to pay corporate taxes.

Corporations enjoy a range of tax deductions for a variety of operating costs, which can lead to a substantial reduction in the company's overall tax liability.

Tax deductions may include the following:

  • Employee wages.
  • Material costs.
  • Production costs.
  • Insurance costs.
  • Retirement plan costs.
  • Business travel expenses.
  • Entertainment expenses.

Credibility and Ownership Advantages

Corporations often enjoy better credibility compared to other business types. Everyone from financial institutions to suppliers, landlords, customers, and statutory authorities will usually view your choice to incorporate as a serious, long-term commitment. For stakeholders, the corporate identifiers in your name — such as “Corp.” or “Inc.” — can convey a sense of stability, permanence, and credibility.

In addition, customers are more likely to see corporations as trustworthy. Corporations are often more attractive to investors and banks when it comes time to seek outside financing.

Corporate owners can easily transfer ownership to another party. To transfer ownership, they can sell or assign their shares. They may transfer to a partner or family member.

This ease of ownership transfer contributes to the perpetual existence of corporations. Just because existing owners leave or pass away, the business doesn't have to end. The life and continuation of a corporation aren't affected by death or withdrawal. This helps owners avoid the legal entanglements that are sometimes associated with transfers in other business structures.

For unincorporated businesses, the withdrawal or death of an owner can greatly disrupt business operations and even their existence. Avoid this risk by incorporating your business.

Management and Investment Advantages

The setup of corporations can give them an improved management structure. Decision-making is centralized, and shareholders have vested authority in their board of directors.

In addition, it's often easier for corporations to raise capital when needed. They can issue shares of stock, making development and growth quicker. If they seek other forms of financing, banks are usually more comfortable lending money to corporations versus unincorporated business ventures. This gives corporations access to a variety of capital sources. They may have an easier time paying off debt, as a result.

People looking to buy a business may prefer to purchase a corporation. This business structure may be more attractive than a partnership or sole proprietorship. New owners know they won't be held personally liable for any wrongdoing from previous owners.

There's also the issue of anonymity and privacy. A corporate business structure gives individuals a way to keep their business affairs and identity private and confidential. Anyone who wants to begin a business but enjoy some anonymity may want to start a corporation. Some states provide high levels of privacy protection for corporations and their shareholders.

Although forming a corporation takes more time and resources than forming other business structures, such as limited liability companies, the advantages that come with the corporate structure are often worth it to their owners. You may want to consult with tax and legal professionals when you decide to start a corporation, to ensure you're maximizing your advantages.

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