Incorporating allows the directors, officers, and shareholders to separate and protect their personal assets in case of a lawsuit or claims against a business entity. In an properly managed and structured company, directors, shareholders and officers have limited liability for outstanding business debts and obligations. This is one of the primary benefits to incorporating.
Corporations benefit from many tax advantages, including tax-deductible business expenses.
For example, medical insurance for families may be fully deductible. Retirement plans, such as a tax-deferred trust can be set up as fringe benefit and may be tax deductible for the corporation. Losses are fully deductible for a corporation. Compare this to an individual running a sole proprietorship that must prove there was a profit motive before deducting losses. Also, any profits can be left in the corporation for further growth, and this could have tax advantages.
S-Corporations have the added benefit of pass-through taxation.
Owners report their share of profit and loss on their individual tax returns. In general, S corporations do not pay any federal income taxes. Instead, the corporation’s income or losses are divided among and passed through to its shareholders. The shareholders must then report the income or loss on their own individual income tax returns.
This eliminates double taxation of income: Income is not taxed twice; once as corporate income (profits) and again as individual dividend income.
Incorporating your company also services to improve your credibility among customers, suppliers and lenders.
One major benefit of incorporating your business is the enhanced credibility of having an “Inc.” or “Incorporated” after your business name. This distinction gives your business with the instant credibility and authority associated with owning an incorporated company. Potential consumers, partners and vendors may be more inclined to do business with an incorporated company over one who is not.
Investment opportunities: The company can attract investors through issuing shares of stock. In certain situations, equity financing is more advantageous than debt financing.
Because an LLC is a separate entity on its own, it, can apply for and build credit separately from the partners’ personal credit. This provides another great benefit to a limited liability company because it helps protects each member’s personal credit and makes bad personal credit less of an issue.