Benefits of incorporating by Mansur Boydaş

By Mansur Boydaş

The entities are constructed under different legal constraints: corporations, sole proprietorships, partnerships etc. The common picture of businesses is that starting as sole proprietorships or partnerships and eventually become incorporated. Each of them has advantages and disadvantages. Corporation is one of them that have many advantages, thus other types of entities incorporate when they grow. Corporations are structured in two different types; nonprofit and profit organization, each have dissimilar prospective. Most of the corporations are structured as profit organizations. Incorporating a business has many advantages but prior to the decision on incorporating, the feasibility of the act should be thoroughly evaluated. The law mentions a corporation as a legal entity that has the same rights: owning property, entering into contracts, and suing and being sued as a person. Corporations are divided into many components that are called shares of stock and the owners of the stock are called stockholders and/or shareholders. There are many advantages of incorporating a business for the owners and some of them are: limited liability, tax savings, and easier raising capital, increasing credibility, privacy and confidentiality, lasting forever, and so on.

One of the most important advantages of incorporating a business is that incorporated businesses have limited liability. Each shareholder has limited liability. This provides the responsibility of its own acts and obligations under the law to the corporations. This distinguishing feature of corporation shields the shareholders of the corporation as the only loss could be suffered is restricted to the amount invested.  In addition the creditors of the corporation could not go ahead of the assets of the corporation to persuade their declarations. Volker states that "incorporation is the best protection for personal assets that you can get in business however; there are other liabilities which you may not be able to avoid by incorporating. For example, if you do not remit certain taxes, you could be held liable as a director of the company". Partnerships or sole proprietorships are subject to almost unlimited personal liability for lawsuits or business debts.

The stockholders or the shareholders are those who have power over the management of a corporation's business and activities and the board of directors who is responsible to shareholders is also elected by the shareholders. The board of directors is responsible from the daily activities of the corporation and they are the ones who decide on the amount of the dividends that is given to the shareholders or stockholders.

Another significant advantage of incorporating a business is the tax savings. Distinguishing tax advantages are provided to corporations unlike partnerships and sole-proprietorships. Faloon says that "the corporation and the individual are two separate tax payers and are taxed at different rates". A new legal entity is established during the process of incorporation, for this reason a wide range of transactions could be well thought-out between yourself and your corporation to be able to accumulate a fair amount of money on taxes. As an example to tax saving: if a person owns a building and rents an office for his/her corporation and declares amortization and other tax inferences for that. The corporation could declare the rental expense. This is not possible for a sole- proprietor or a partnership. According to Hetu "there is an act called income shifting which is a method in which the total income of your corporation is divided among its members and by shifting the income to a number of individuals, the overall tax that is required to be paid on it can be significantly lower, which is a great tax advantages of incorporating a business". Incorporating a business comes with extreme benefits and dynamics into the tax benefits.  The other types of entities do not get the same type of tax benefits also on medical and retirement plans. There are other deductable that other types of entities do not get the benefit from.

Incorporating a business along with other factors provides advantages on raising capital that is also a significant advantage. Ward states that "corporations also have more ability to raise money, which may make it easier for your business to grow and develop and while corporations can borrow and incur debt like any sole proprietorship, they can also sell shares and raise equity capital, a big advantage because equity capital generally does not have to be repaid and incurs no interest". There are many ways of raising capital and one of them is to selling stock or other equity interests. Investing in a corporation provides more security of the investment as it is possible to lose all investment made in sole proprietorships if a personal claim is made against the company, as the person could be seen as a partner. Corporations have the same legal rights as a person and they also have the same right when it comes to breaking the law. There have been numerous corporations who have broken the law. They broke the ethical, environmental and antitrust laws. The penalties were really a drop in the bucket of the amount of money that corporations make by breaking these laws. Thus, the capital of corporations increased everyday and they do not feel to obey the law. Sorry to say, this is a unambiguous benefit to incorporating a business. It is much easier to raise money via loans or investment as getting the capital much easier that shares could be sold or if you need a loan a corporation includes power when dealing with loaning organizations.

Another significant advantage of incorporating a business that is non-finance is increasing credibility. People feel more in no doubt and safe whilst dealing with corporations that other types of entities. According to Gordon "if you are doing a startup business that was begun as a hobby, the simple act of incorporating will increase your credibility with customers as well as the IRS and having a corporation, a corporate bank account, and expenses paid by the corporation greatly increases the likelihood that the IRS will believe you are in a business and entitled to write-off items and expenses the IRS might otherwise challenge". IRS is the US government agency conscientious for tax collection and tax law enforcement. Including the notations "Corp" and/or "inc" after company's name put in trustworthiness, stability and professionalism to business.

On top of the numerous benefits listed above, there is also privacy and confidentiality benefits of incorporating a business. Among the different types of entities corporation has the advantage of keeping your characteristics as your business affairs secretive and not to be mentioned. Corporation is the best way to linger mysteriousness for the corporation and its shareholders.

Lastly, another important advantage of incorporating a business is that lasting forever. Goumakos indicates that "the corporation can endure almost forever irrespective of what happens to the shareholders, directors, or officers and this is not the case with sole proprietorships, partnerships or even limited liability companies. For example, if an owner, partner, or member dies the business automatically ends or gets wrapped up in legal red tape. Corporations, on the other hand, have unlimited life". The life of corporation is unlimited as there is more than one owner of the company, thus the problem of legal battles with family members who could maintain rights to the business. Regardless of any one's death would stop the operation of the corporation, as the ownership of the business could be reassigned by selling stocks in the corporation. This feature does not apply to any other business type.

Incorporating a business has many advantages; limited liability, tax savings, and easier raising capital, increasing credibility, privacy and confidentiality, lasting forever, and so on. The decision making process is very important whether if it's a good idea to incorporate or not. The richest businesses in the world are the corporation because of easy raising capital, limited liability and advantages. It is clearly illustrated that incorporating a business is beneficial and has numerous advantages. The worst advantage of the corporations that they would have used up the environment for its own purposes and there is not much to end this destruction. Corporations have unlimited life regardless of a death of a shareholder or manager.

Mansur Boydaş