If you’re a business owner, one of the first questions to ask yourself is whether or not you should incorporate.
The biggest advantage of incorporating is that it limits your legal liability. Your responsibility for debts and other liabilities incurred by a corporation is generally limited to the assets of the business. Your personal assets are not usually at risk, although there can be exceptions to this general rule. The trade off is that there is a cost to incorporate and, in some cases, tax consequences.
If you do decide to incorporate, you’ll face a choice of corporate forms. All offer limitation of your liability, but there are differences in tax and other issues. Take a look at the options:
- C corporations. The traditional form of corporation is the C corporation. This type of corporation has the most flexibility in structuring ownership and benefits. Most large companies operate in this form. The biggest drawback is double taxation. First the corporation pays tax on its profits; then the profits are taxed again as they’re paid to individual shareholders as dividends.
- S corporations. The S Corporation avoids this double taxation. It is called a “pass-through” entity because there’s no taxation at the corporate level. Instead, profits or losses are passed through to the shareholders and reported on their individual tax returns.
Whether you’re already in business or just starting out, choosing the right form of business is important. Even established businesses change from one form to another during their lifetime.
Call our office (and your attorney) for guidance in selecting the form that is best for your business.
Written by: Doug Rodrigues