Pros and Cons of Incorporation

What Are the Benefits of Incorporating Your Small Business?

Jan 22, 2008

For some, the benefits of incorporation outweigh any disadvantages. For others, the time and expense involved create roadblocks to incorporating your business.

Being incorporated offers several distinct advantages, but also requires time and effort on your part. Each small business will need to weigh the pros and cons of incorporation to determine if it is best for your company.

Owner Liability

Once a company becomes incorporated, the owner’s legal liability is limited. The corporation becomes a separate entity and would be, in itself, legally liable for any debts or activities. In order to protect yourself and maintain limited liability, your corporation must follow certain procedures. These may include:

Being incorporated gives you the opportunity to enhance your employee benefits by adding stock or stock options to attract potential employees. Some companies may choose to offer stock options, allowing the employees to purchase stock at a preset and locked-in price.

Management Structure

An incorporated company has directors, officers and shareholders. Directors are normally listed on your articles of incorporation and are responsible for choosing the officers of the company. Each of these groups of people has defined roles and responsibilities. This allows you to create a management structure and chain of command as well as determining specific areas of responsibilities. For very small corporations, one or two people may be in all of the roles.

Attracting Investors

If you are looking to seek capital investors for your corporation, it is much easier if you issue stock.

Following Corporate Procedures

Although the advantage of following corporate procedures provides you with only limited legal liabilities, there are distinct disadvantages to this. Most state laws regulating corporations will require you to keep accurate and updated records on director’s meetings, corporate decisions and financial records indicating the corporation’s financial independence from the officers and directors. This can be time consuming or costly if you choose to hire someone to do your bookkeeping and record keeping.

Incorporation Costs

Deciding to become incorporated requires completing and filing paperwork and each state has their own fees that must be paid (normally to the Secretary of State.) Completing the paperwork can be time consuming or expensive if you choose to have attorneys complete the paperwork for you.

Tax Liability

Although being incorporated may offer some tax advantages and extra deductions (such as health insurance premiums), it also may be double taxed. That is, the corporation will pay taxes on any profits. Additionally, any shareholders that receive a portion of the profit will be taxed again on this income. Small corporations incorporated as “S” corporations will not be affected by the double taxation. Additionally, when the stockholders also work for the company and receive salary rather than dividends, the double taxation will not be a factor.

Whether you decide to incorporate your small company is a personal decision and must be right for you. If you are not sure, it would be best to speak with an attorney and an accountant who can advise you on the benefits based on your individual situation.

You might also be interested in the following information for Small Businesses

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The copyright of the article Pros and Cons of Incorporation in Small/Home Business is owned by Eileen Bailey. Permission to republish Pros and Cons of Incorporation in print or online must be granted by the author in writing.