If you're starting a new business, one of the first decisions you'll have to make is how to organize your business and whether you should incorporate your business.
There are many different types of business forms you can take including sole proprietorships, partnerships, limited liability companies, and corporations. The type of business you plan to run, your willingness to take on risk, and the amount of business you expect will likely drive what type of business form you take.
Incorporating your business is probably the most expensive and complicated business form you can take. So before you take that step into incorporation, you may want to consider these pros and cons.
Pros of incorporating your business:
- Owner Protection from Legal Liability. Owners of a corporation have a limited amount of legal liability for the corporation's business activities and debts, because in the eyes of the law the corporation is a separate entity from the person.
- Ability to Attract Investors. The corporation's ability to issue stock is a strong selling point to those willing to invest capital in a business venture. In addition, you'll probably look more serious to potential investors if you are a corporation.
- Stock and Stock Options for Employees. The corporate business structure offers an appealing opportunity to potential employees as corporations can issue stock and stock options. Stock benefits are also helpful for starting companies that may not have that much capital to pay competitive salaries.
Cons of incorporating your business:
- Time and Cost of Incorporation. As mentioned before, the incorporation process can be very expensive and time-consuming. A number of documents must be prepared (including the new corporation's articles of incorporation and bylaws), and filing fees must be paid to your state's Secretary of State office (or similar business filing agency).
- Following Corporate "Formalities." All corporations are required to observe a number of corporate formalities. These requirements can include holding regular meetings of directors, keeping records of corporate activity, and maintaining the corporation's ongoing financial independence.
- Potential Tax Liability. The profits from corporations may be "double taxed." This means that the corporation is taxed for profits earned, and any individual stockholders (you) are also taxed.
Choosing your business form is one of the first important decisions you will make as a business owner. Keep these pros and cons of incorporating your business in mind when deciding whether incorporation is right for you.