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Starting a business may seem overwhelming and complicated due to the multitude of decisions that must be made prior to getting started.  Fortunately, one of the first seemingly difficult choices, deciding whether to be a corporation or a sole proprietorship, is actually a fairly easy one to make. The advantages of being a corporation rather than a sole proprietorship are evident as seen below. 

For most business owners, the primary advantage of operating as a corporation is ensuring limited liability. When a business owner operates as a sole proprietorship the company and the owner are treated as a single entity for purposes of liability, including taxation.  Thus, if a business operates as a sole proprietorship, the owner can be held personally liable for any acts or debts of the business.  Consequently, if the business has debts that cannot be covered with business assets, creditors have a right to demand payment of the debts from the owner’s personal assets, such as funds in a personal bank account.  With a corporation, only corporate assets and the money that has been invested are at risk. 

In addition, a corporation offers numerous tax advantages.  Corporate tax rates are often lower than individual rates.  Because an owner of a sole proprietorship and the business itself are treated as a single entity, the income tax rate that applies to the owner also applies to the business possibly causing higher taxation.  If you incorporate, your business rates likely will be lower. Being a corporation allows you to pay yourself a salary, keep the remaining profit in the corporation, and in turn, be taxed at a lower rate than if all profits went directly to you and were treated as personal income.  You can also deduct certain fringe benefits, such as, health and life insurance against a corporation, items which otherwise would not be allowed as exemptions on personal tax returns. 

In general, a corporation tends to create more credibility than a sole proprietorship.  Registering your business not only legitimates the company in that it calls for accountability requirements, but it also adds a professional stamp of approval that would not otherwise exist.  This credibility can be seen in many ways.  For one, it is often easier to borrow money and attract investors through a corporate entity.  Banks may be more likely to make a loan to a corporation and investors easily can accept stock in exchange for capital contributions and transfer shares simply. Furthermore, as a corporation, you can issue stock options to employees as incentive or as a reward.  This ability will attract employees who have a stake in your business’s future which can help ensure its success.

A corporation is an independent entity with perpetual existence. This fact means the business can survive even after shareholders pass away. Being a corporation ensures the business can pass on from generation to generation if so desired. 

Finally, if you hope to go public with your business, you will have to be a corporation.  There is no way around it; therefore, creating a corporation now will make this transition and growth easier and more efficient when the time is right.

Incorporating your business is not as time-consuming or expensive as you may think.  If you want to protect personal assets, attract investors, and legitimize your business, forming a corporation is a smart choice.