What Are the Benefits of Forming a Corporation?
When you start a new business, choosing its legal structure is one of the most important decisions you will make. There are advantages and disadvantages to many types of structures that might depend on your circumstances and industry. Many businesses, however, choose to form a corporation instead of a partnership or remaining a sole proprietorship.
Each state has its own statutes for corporations, which govern how a corporation is formed, organized, merged, and dissolved. Those laws also dictate things such as the duties and powers of directors, the rights of shareholders, and corporate finance. While this may sound complicated, a qualified business attorney can easily explain what does and does not apply to your situation.
The reason your business may wish to choose a corporate structure instead of the other options is that it provides quite a few benefits.
Limited Liability for Owners
One of the most significant advantages of forming a corporation is that the company will exist as a business entity that is separate from its owners. This means that the company can own its own property, pay its own taxes, enter into its own contracts, and have its own responsibilities, rights, and liabilities.
The benefit to the corporation’s owners, or shareholders, is that they are not personally liable for the liabilities and debts of the business. For example, a vendor or dissatisfied customer cannot pursue the company owner’s personal assets to satisfy a claim. This is not the case with sole proprietorships and partnerships, where the owner and the business are considered a single legal entity.
Incorporating your business has certain tax advantages over other types of businesses. These include:
- There are fewer restrictions on a corporation reporting corporate capital losses;
- Since there are fewer restrictions and the presumption of more transparency, corporations have a lower chance of an audit than a sole proprietorship;
- Can deduct 100% of the cost of life and health insurance premiums paid on behalf of employees and owners (sole proprietorships are limited to 60% of medical premiums);
- Corporation owners will not pay self-employment taxes, and the corporation’s income is not subject to worker’s compensation, Social Security, and Medicare taxes; and
- Corporate owners can divide income between shareholders (owners) and the corporation.
Perpetual Legal Existence
According to state law, your corporation has the power to exist perpetually, meaning it can outlast the lives of its founders and owners. The business itself will not terminate upon the death of a shareholder or when their ownership interest is transferred. This is not the case with other types of business entities, where a business or partnership could end when an owner passes away.
When you operate as a sole proprietor, it might be simpler, but it won’t provide you with the credibility that your business needs to be successful. Incorporating your business is one of the best ways to establish that credibility in the eyes of potential customers, business partners, and even employees.
Access to Capital
If your business wishes to raise capital for growth or cash management, this may be a challenging task as a sole proprietor or partnership. When you form a corporation, you have more access to capital in several ways. You can issue stock in your company to raise funds. A more common way is through a small business loan. What many businesses don’t realize is that most lenders require that a company be incorporated before they will consider approval of any type of bank financing.
A few of the other benefits associated with forming a corporation are that you can easily transfer ownership and establish qualified profit-sharing, pension, or retirement plans, such as 401(k)s, for the company’s owners and employees.
Speak with a Knowledgeable Southern Kentucky Business Attorney
There are many advantages to forming a corporation, but this is not an uncomplicated process. Each business is unique, and it’s essential that your company’s structure will suit your needs and goals. Lanna Martin Kilgore, PLLC is an experienced business litigation lawyer who can help your company with its business formation needs in Southern Kentucky. Contact our office now at 270.846.3700 or reach us online to schedule a free consultation.