Is incorporation the right choice for my business?

For this the last post in our series on tax structures and choosing the right one for your start-up or small business, we will focus on corporations. 

What is a corporation?

A corporation is defined first and foremost as a separate legal entity distinct from its owners. Corporations have many of the same rights and privileges as individuals. Corporations can sue and be sued, enter into contracts, loan and borrow money, own assets, hire and fire employees and pay taxes.

The main reason for choosing incorporation is protection of personal assets. Because of the limited liability aspect of incorporating shareholders enjoy profits through stock appreciation or dividends but are not personally liable for company debts.

Corporations can exist in perpetuity regardless of persons involved leaving, dying or divesting in the business. There are three main types of corporate classifications, General Corporations, C-Corporations and S-Corporations.

The three main types of corporate classification

General Corporations - With this type of business structure the shareholders are the owners of the company. The number of shareholders allowed to invest in the company is unlimited. The stock or shareholders are not personally liable for company debt.

The personal liability of stockholders is generally limited to the amount of their investment. This is the most common type of corporate class structure. Advantages of forming a General Corporation include better access to capitol and certain tax-free benefits. However, this type of structure is often subject to more state and federal regulations.

C-Corporation - The first main distinction of a C-Corporation from an S-Corporation is that C-Corporations are taxed as an entity and profits are simply distributed as dividends. C-Corporations do not have to file financial statements and have a great deal of business flexibility. However, C-Corporations must have a director who offers available shares for sale to current investors before making them available to the general public. C-Corporations are typically big name brands.

S-Corporation - This type of structure is fairly common for small and medium size businesses that want both the protection of personal assets and the “pass through” taxation of a partnership structure. An S-Corporation’s profits, losses and tax liability are reported on the personal income tax returns of the owners or shareholders. Thus an S-Corporation avoids the double taxation of a C-Corporation. This model is advantageous for businesses with many owners or shareholders.

How do I decide which tax structure is best for my business?

In our series on deciding which tax structure is best for startups and new businesses we have covered Sole Proprietorships, Limited Liability Companies, Partnerships and Incorporation. We have provided some of the key points, pros and cons of each to help guide new business owners in making the right choice. However, because each business and each entrepreneur is unique it is a good idea to get some professional advice about your new venture.

Tom Bulger, CPA can help you weigh the pros and cons of each type of business structure. Tom believes in entrepreneurship and wants to help you succeed in business. He has been helping people achieve their business goals for over 25 years. Talk to Tom Bulger, CPA today.

Do you have questions about choosing a tax structure for your startup or small business? Post your thoughts and tell us about your new venture in our comment section below.

Check back for our next post on tips for managing your cash flow.