The Advantages of Creating a Corporation
Choosing the right business structure is extremely important because certain types of businesses offer better protection against legal action against business owners than other types do. This is one of the reasons corporations have been popular for a long time. The corporation is seen as its own entity and very rarely can someone sue a corporation and go after personal assets of board members.
The downside to that protection is that corporations are governed by a board of directors. You may be the founder of a corporation, but once a board is in place you no longer have entire say over how things go. More than one corporation's founder has been booted by a board.
So as you read about some of the benefits and advantages of forming a corporation, keep in mind that you may still want to consult with a business lawyer or tax professional to make sure that you are making the best decision for your business -- and for you.
Advantages of Creating a Corporation
There are many forms of business structures and each has their own advantages and disadvantages. If you are new to business or uncertain as to what type of business structure is best for your business, consult a tax professional, accountant, or business attorney before you start a corporation. Here are two important benefits of starting a corporation:
Limited Liability for Owners
Corporations offer limited liability risks to their owners (shareholders). In most corporate structures, shareholders are not personally liable for the debts and other liabilities (including legal) for the business.
For example, in a well-structured corporation, creditors cannot pursue owner's/shareholder's personal assets for the corporation’s debts.
In sole proprietorships and general partnerships, the business and the owner are considered one legal entity. But a corporation is considered its own entity and therefore, separate from the owners. Depending on the corporation’s legal structure and duties of individual board members, there may be some legal liability exposure. Board members may not always be immune from law suits if they are accused of financial or other corporate mismanagement. Be sure to have the right business insurance to protect board members if they are sued.
Tax Advantages of Corporations
Corporations can have certain tax advantages over other forms of businesses:
- There are few restrictions for corporations on reporting capital losses (which are generally be carried back three years and can be carried forward for up to 15 years)
- Because there are fewer restrictions, and presumably greater business transparency, corporations are less likely to be audited than sole proprietorships
- May deduct 100% of the cost of health and life insurance premiums paid on behalf of owners and employees (sole proprietors filing an individual return may currently only deduct 60% of medical premiums)
- Corporate income is not subject to Social Security, workers compensation, and Medicare taxes; and owners do not pay self-employment taxes.
C-corporations also have the benefit of dividing income between the corporation and the owners (shareholders). This ability to distribute income can save the corporation considerably on taxes. This distribution of profits, however, also causes double taxation, which is seen by many as a disadvantage.
In a sole proprietorship, the business owner may personally benefit from tax advantages, but they are also subject to self-employment and other taxes.