Small business owners often choose to form a corporation. Read below to see why a corporation can be the best option for your business.
Whether you are a new business owner, or already run your business as a sole proprietorship or general partnership, you may want to go one step further and form a corporation. There are several steps you should take to make a smooth transition, and TRUiC provides you with useful information on why a corporation can be a good choice for your existing business or next move.
Is a Corporation a Good Option for a Business?
Some business owners consider a corporation as a costly or time-consuming solution and they would rather stick with what they currently have. Again, for others the time they will invest in forming a corporation is nothing compared with the advantages they will get.
Depending on your business and goals, you should take into consideration all the advantages offered by a corporate business structure and see how they can apply to your business and your plans for its future. These benefits far outweigh any potential disadvantage because in many cases they are not available to sole proprietorships and general partnerships.
What are the Benefits of Corporations?
There are several benefits that corporations have and business owners consider them very valuable.
Limited Liability
Owners of corporations are not personally responsible for any debts or losses that the business may have. Even though their investments in the business are jeopardized, if anything goes wrong creditors can’t take away any of their personal assets.
In a sole partnership or general partnership, the owner’s personal assets can be used for paying business debts, as the owner’s personal and business assets are legally considered to be linked.
Possibility of Raising Capital
For corporations, raising money is much easier. If they are publicly held, they can raise capital by selling their shares or by issuing bonds. Bank loans are more easily issued to corporations than to other types of businesses.
Ownership Transfers
Structure of the ownership in a corporation is not difficult and it is easily transferable. If someone doesn’t want to be a shareholder anymore, the only thing he needs to do is sell his shares. This is a general rule that applies to almost all corporations, but depending on the type, some restrictions and differences may exist.
Unlimited Life
A corporation’s life is unlimited because it does not depend upon its owners. Ownership can change – it can pass from generation to generation of investors without affecting the business. Also, if the owner wants to sell his shares or he dies, the corporation continues to exist.
Tax Advantages
Many states are trying to create better environments and attract more businesses. Some of them are giving better tax rates and tax advantages for corporations, such as the deductibility of expenses or savings on self-employment taxes. In some states, there are no income or sales taxes for businesses. Tax advantages also depend on the type of corporation. For example, in the S Corps, all profits and losses are passed through the owners so the corporation itself doesn’t pay income taxes.
Establishing Credibility
When you have a corporation, it can help your business to establish more credibility with employees, potential partners, and customers. Also, because of tax reasons, a corporation can attract more investors or vendors in comparison to other business types.
Employees Plans
There are some benefits for employees like retirement funds and qualified retirement plans, which can be established more easily within a corporation.
It Can be Established by a Non-US Citizen
A non-citizen can also start a corporation in the United States if they have a physical mailing address and a bank account in the US.
When to Form a Corporation?
If you already have your business, in certain cases it can benefit from this form of a corporate structure.
Case 1: You Cannot Spend a Profit During a Tax Year
If you are not able to spend your profit during a tax year to grow your business, it can make sense to structure the business as a corporation rather than an LLC because of the difference in how a corporate business is taxed.
Case 2: You Want to Attract Venture Capitalist and Investors
If you need additional funding and you have to attract investors, then starting a corporation can be a good business decision. Venture capitalists and investors will rather choose to support a corporation because of the difference in the taxes they would pay.
Case 3: Benefits in Managing a Complex Business Structure
Corporations are more complex organizations then LLCs. Managing corporations can include a lot of additional work and have additional costs for hiring external consultants like accountants. If by starting a corporation you get more than you invest, then you should go for it.
