The Benefits of Incorporating a Business

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Jeffrey Johnson is a legal writer with a focus on personal injury. He has worked on personal injury and sovereign immunity litigation in addition to experience in family, estate, and criminal law. He earned a J.D. from the University of Baltimore and has worked in legal offices and non-profits in Maryland, Texas, and North Carolina. He has also earned an MFA in screenwriting from Chapman Univer...

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UPDATED: Jun 19, 2018

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Incorporating a business provides many benefits, ranging from liability protection to tax benefits. However, the primary benefit (and the single most important reason) many business owners decide to use the corporate form of doing business is limited liability. If you, as the business owner, maintain the corporation’s legal status properly, and avoid personally guaranteeing the corporation’s obligations, your corporation, and not you, would be solely responsible for its own obligations. Put another way, if your corporation cannot pay its bills, the creditors can only recover from the assets of your company.  Sole proprietors and general partners in a partnership are personally liable for all debts and obligations of the business. This includes loans, accounts payable, judgments resulting from litigation, and business losses.

Tax Benefits and Fundraising for Businesses

Incorporating also makes it easier to raise funds for the business from outside investors. Issuing stock to be purchased by investors is more advantageous than taking out a bank loan and making interest payments. The same can be said for corporate bonds.

Forming a corporation also provides numerous tax benefits. Corporations are taxed at a lower rate than individuals. Both regular corporations and LLCs may deduct normal business expenses like employee salaries before they allocate income to owners. Corporations can also deduct 100 percent of medical insurance premiums. Because corporations are separate legal entities, they can own shares in another corporation and receive corporate dividends 80 percent tax-free.

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Other Benefits of Incorporating

Some other benefits of incorporating include name protection and the sense of image that comes with it. Most states will not let another business file articles of incorporation with your exact name. This reduces confusion and helps you establish your brand. It also adds credibility and permanence. Having “Inc.” or “LLC” after your business name adds instant authority. Consumers, vendors, and partners may prefer to do business with an incorporated company.

Finally, there is perpetuity. Permanence results from incorporating—whether you start with one person or several. As long as the owners comply with federal and state regulations, and keep filings up-to-date, a corporation exists forever. It survives the death of owners and shareholders. The only way to end a corporation is through dissolution.

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