In our capitalist world, businesses need to grow to succeed. It’s one of the most basic principles of a free market economy. If you own a business, you probably spend a lot of time thinking about how you can ensure your company’s growth and viability. If you do, chances are you’ve at least wondered about turning your company into a corporation. This is called incorporation, and there are a number of benefits it can have on your company.
What Is Incorporation?
Incorporation is the act of filing a company as a corporation, which (depending on the state you’re incorporating in) involves various requirements. Some states have simpler incorporation laws than others, usually as a ploy to get more businesses in the state.
Corporations are different from partnerships and privately owned companies, in a number of ways. Some of the biggest legal benefits include:
- Limited liability. As a business owner, you have a lot of yourself invested in your business, both emotionally and financially. You’re responsible for all the debts your company takes on, and if it loses money, you’re responsible for that, too. In corporations, however, investors, directors, and board members are only responsible for their investments, not the company’s overall debts and obligations. If you were to invest $50 in a company, you’d only be responsible for that $50. Even if the company goes belly-up, you’re only out your $50 investment.
- Separate legal entity. Corporations are considered separate legal entities, distinct from the people who own them. They pay taxes separately, and they can sue or be sued in their own name.
- Transferable ownership. Unlike in privately owned businesses, corporations have easily transferable ownership. The ease with which ownership can be changed differs from state to state, with Delaware corporations being particularly easy to transfer, as they don’t need to be recorded or filed.
- Tax Purposes. Under US tax law, corporations have tax rates lower than individuals do. Because corporations are separate legal entities, they can invest in other companies, just like individuals can. However, they receive their dividends 80% tax-free.
- Selling stock. Corporations can raise funds by selling shares of stock in the company. However, it’s worth noting that this dilutes the ownership of the company.
- Continuity. Unlike smaller companies, a corporation can survive regardless of the deaths of board members or directors.