The decision to incorporate has certain distinct advantages, which may help you bring your business into the next level of success. The easiest benefit to point to is the status of corporations under United States law as its own entity rather than a partnership between numerous people. Incorporation of your business will allow the name appearing on deeds, bank accounts, and other legal documents to be that of the corporation itself rather than that of an “owner.”
Using a corporation as legal entity allows shareholders to maintain limited liability, meaning the corporation is generally responsible for its debts, not the shareholders. The exact benefits of incorporation depend on which type of corporation your business becomes as well as the state in which you incorporate. The most frequent ways in which corporate entities differ is in how they are taxed.
One of the most common types of corporation, a C corporation is taxed by the IRS separately from its shareholders. The revenue of the corporation is taxed, as are the respective incomes of its shareholders. There is no limit to the amount of shareholders a C corporation may have, either foreign or domestic. A C corporation is able to distribute funds to its subsidiaries and vice versa without further taxes. This is known as dividends-received deduction and helps keep a C corporation from being taxed more than twice.
Tax benefits are the most common reasons to incorporate in the S corporation structure. Rather than the double taxation a C corporation faces, an S corporation generally has no federal income tax levied against. Shareholder incomes are taxed, but not the corporation’s revenue. However, businesses seeking incorporation into this form must meet certain requirements not needed for C corporations. One of these is that there be no more than 100 shareholders. These shareholders must also be citizens or legal residents of the United States.
According to the State of Delaware, “More than 50% of all publicly-traded companies in the United States including 63% of the Fortune 500 have chosen Delaware as their legal home.” Delaware is a well-known haven in which to incorporate as it charges no income tax to businesses which underwent incorporation in the state but do not operate there. Because, it has been a haven for longer than most others, corporations are attracted to the dearth of corporate law precedents and efficient corporate law system operating there.
Limited Liability Company (LLC)
While not an actual corporation, an LLC shares some of the same benefits as a corporation, primarily the state of limited liability for its members. Perhaps the greatest benefit of forming an LLC lies in that it can be taxed as a variety of different entities, such as an S or C corporation as well as a sole proprietor or partnership, depending on what it could also qualify as. We can hep you get started creating an LLC.
A nonprofit organization shares similar tax exemption status with corporations, but an NPO does not have shareholders, nor does it distribute profits to its members. An NPO uses any profits to further its own goals. Incorporation into an NPO will not result in substantial monetary gains, but the tax advantages of this status may help further the goals of your organization, provided those goals are not exclusively based on the accumulation of wealth.
Since incorporation law and status can vary depending on the state in which the corporation is made, it is important to research the unique regulations associated how to incorporate in your area.