Incorporating 101 – Everything You Need to Know Before Incorporating
Submitted by JMB Financial Managers on December 27th, 2019
One of the most confusing obstacles you will face when running your own business is deciding whether or not to incorporate.
Luckily, my years of working with small business owners has left me with some knowledge and experience that I’m excited to share with you. Today I’m going to explore with you some of the advantages and disadvantages of corporations, but first let’s start with the basics.
What is a Corporation?
A corporation is a separate legal entity meaning it is treated as a legal person separate from its owners which provides them (the owners) an array of protections both legally and financially. A corporation can easily be created by filing articles of incorporation in your state, but I highly suggest seeking legal assistance to guide you through this process.
Limited Liability
The most attractive aspect of a corporation, in most people’s opinion, is limited liability. Put simply, it means that shareholders can only lose as much as they invest in the corporation. During a lawsuit, a company cannot come after the shareholders, only the corporation, because it is treated as a separate legal entity.
Perpetual Existence
Another great and unique quality of a corporation is perpetual existence, in other words, the lifespan of a corporation is indefinite. As a separate legal entity, a corporation carries on even if an original owner decides to leave. This automatically makes your company a “safer” investment than other less permanent business structures.
Taxation of Corporations
I know I know, everyone’s least favorite subject, but it had to be covered! At this point, you’ve probably picked up on a trend – most of the perks of being incorporated stem from one thing – a corporation is a separate legal entity.
When it comes to taxes, this is not necessarily a perk. Being a corporation potentially opens up the door for double taxation. Double taxation is a tax on the corporation’s earnings as well as a tax paid by shareholders on dividends paid out by the corporation. This applies to businesses that become C-Corporations.
Fortunately, small business owners that meet the requirements can file as an S-Corporation or a Limited Liability Company instead of a C-Corporation and avoid paying corporate taxes altogether with income and deductions being passed through to the shareholders.
Learn More About Incorporating Today
As you can see, there are several types of corporations to choose from depending on the needs of your business. To learn more about your incorporating options download our free guide, Incorporating Options and Opportunities, here.
Of course, incorporating can have drawbacks as well, and we encourage you to speak with an attorney or a qualified business formation consultant before proceeding with incorporation. If you're interested in learning more about incorporating, please feel free to schedule a free consultation with us today.
--
About the Author
Jack Brkich III, is the president and founder of JMB Financial Managers. A Certified Financial Planner, Jack is a trusted advisor and resource for business owners, individuals, and families. His advice about wealth creation and preservation techniques have appeared in publications including The Los Angeles Times, NASDAQ, Investopedia, and The Wall Street Journal. To learn more visit https://www.jmbfinmgrs.com/.
Connect with Jack on LinkedIn or follow him on Twitter.
