Advantages of Incorporating a Company
Incorporating a company makes sense for most small business owners. Unfortunately, many of them fail to take this important step and then miss out on numerous benefits. In addition to tax savings and limited liability protections it provides for themselves and their assets, many other advantages make incorporating a company an essential step toward small business success.
Limited Liability
Many businesses start out as a sole proprietorship, which means that you, as the owner, are responsible for all of the company's liability. Debtors can seize your personal assets, such as your house and vehicles, to cover the incurred debt. With incorporation protections, you become a shareholder of the corporation, and therefore are not personally liable for the company's debt in the event that it goes bankrupt or is shut down for any other reason. You are only responsible up to the amount of money you have currently invested in the company.
Raising Money
Corporations can grow faster because they have more sources for raising capital. You can "go public." By incorporating a company, you can issue and sell corporate stock to shareholders to raise equity capital, which typically does not incur interest or have to be repaid. The only disadvantage is that you lose a percentage of ownership when you sell shares.
Unlimited Life
Incorporating a company means you are essentially creating an entity that can live forever. Even if you sell the business, the shareholders die or sell all of their shares, or there is a change in ownership, the corporation continues to operate.
Higher Business Profile
It's easier to attract new investors for a corporation because of the limited liability and other advantages previously discussed. But that's not all. Incorporating a company and putting Inc., Corp. or other legal designation after your name can increase your customer base because people tend to think of corporations as being more established and stable.
Tax Savings
You are required to pay self-employment tax on your profits when you operate as a sole proprietor. Conversely, by incorporating a company, you only have to pay self-employment tax on the salary you pay yourself.
Consider the following example: Say your business has $200,000 of gross income in 2011. Your deductions total $100,000, leaving $100,000 of income that you will receive. How does having a corporation and taking $100,000 partially as salary and partially as dividends save you money?
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If you operate as a sole proprietorship you must report the entire $100,000 as earnings from self-employment as income on your 1040 form. You must also pay self-employment tax on these earnings, which will be $12,283. (You are entitled to deduct one-half of this payment from your gross income.)
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One the other hand, by incorporating a company, you can elect to receive a $20,000 dividend and $80,000 in salary. The total employment tax liability is $10,640. (Although your corporation receives a deduction for the employment taxes it pays.) Using the dividend/salary strategy would save you over $1,600 in employment tax liability in 2011.
And, if you're incorporating a company as an S corporation, you can avoid "double taxation" and reap even more tax benefits. There are a multitude of factors to consider when determining if you should incorporate your business, and if so, which type of entity to form.
Are you thinking about starting a new business or want to incorporate your sole proprietorship? If so, incorporating a company is easier and more affordable than you might think. Learn more about the many advantages of incorporation by visiting www.TheDelawareCompany.com or calling 1-888-338-2677.
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The incorporation of a business is often a wise decision for a sole proprietorship. Among the many benefits of incorporating are limited liability status, tax savings, and establishing a higher business profile. But after the incorporation process is complete, business owners must be vigilant to ensure that they adhere to the requirements of maintaining their protected status.
There are many questions to consider when starting a corporation or limited liability company (LLC): Why should I incorporate? How do I incorporate? Where should I incorporate? The list goes on and on.
There are many different ways to form a company, so it's important to weigh your options to understand whether you want to be a sole proprietorship, partnership, limited liability company (LLC), S-corporation, or C-corporation. For many business owners, forming a limited liability company is the best option as it provides protection of your personal assets, offers tax benefits, and requires fewer ongoing formalities than a corporation.
Delaware is the most popular state for business incorporation. And it's not because Delaware was the first state to sign the U.S. Constitution. It's because incorporating in Delaware offers so many special benefits to small and large businesses alike. That's the reason more than half of all Fortune 500 companies—and half of all publicly-traded companies—are incorporated in Delaware.
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