These Are the Benefits of Forming a Corporation

benefits of forming a corporation business tax structure

Are you looking to choose a business structure for your new company? 

There are a handful of structures to choose from, but it’s clear you’ve settled on forming a corporation. 

What comes to mind when you think of a corporation? If you’re anything like most entrepreneurs, you’re thinking of big companies like Apple, Amazon, and Alphabet. There are good reasons these companies are corporations instead of, say Limited Liability Companies. 

Forming a corporation is a bit more procedural and costly than forming an LLC or a partnership, but the benefits are worth it. Continue reading to learn the advantages of setting up a corporation. 

Zero Personal Liability 

When you start a business, you’re starting a journey that could end in two ways: success or failure. 

While the former is the goal of every business owner, it’s possible to end up losing everything, including personal possessions such as a house. In fact, several entrepreneurs have lost far more than they invested in their businesses. 

This is what happens when you choose a business structure that exposes you to unlimited liability. If you set up a sole proprietorship, for instance, you get no liability protection. If you borrow a business loan and use your house as collateral, for example, nothing will stop your creditor from coming after your house if you default on the loan. 

When you form a corporation, you have great liability protection. A corporation is a legal entity, able to enter into agreements. If the corporation sinks in debt, the creditors will only come after assets that are owned or registered under the company. Your personal assets are safe. 

Business Credibility 

Quick question: 

You’re browsing through the web, looking to buy some chemicals for your manufacturing business. You come across two sellers: One is registered as a sole proprietorship and their other is a corporation. 

From which company are you likely to buy? The sole proprietorship might even offer better customer services, but you’ll likely give your money to the corporation. This is because corporations are typically credible. 

Credibility is what you get when you form a corporation. You’ll easily win over new clients just because your company is a corporation. 

This isn’t to say all corporations are credible. On the contrary, there are many shady corporations that are out to rip off unsuspecting clients. However, when you’re starting a new business and want to increase your credibility, you’re better off forming a corporation. 

A Corporation Lives On and On and On… 

You’ve probably seen businesses that went down with the demise of their owners. Such businesses are either sole proprietorships, partnerships, or even LLCs. 

When you own a sole proprietorship, for instance, you’re your business. If you aren’t there, it will likely collapse, unless you have a solid business succession plan in place. In a partnership of two partners, the business could be wound up when one partner dies or leaves. 

But in a corporation, the business isn’t affected if one shareholder leaves. The company simply lives on and on, and can only be wound up by bankruptcy. 

This is a good feature when you want to raise funds from external investors. Since they know the business will keep going on even in your absence, it’s much easier for them to invest their money. 

Raising Capital 

When you want to expand your business operations to a big scale, it’s inevitable that you’ll need more capital. Unless you’re ultra-rich, you won’t be able to finance the expansion from your own pocket. Heck, even the ultra-rich prefer to use external funds when raising capital for business expansion. 

Your business structure will have a big impact on your ability to raise capital. No serious investor is going to pump serious money into a sole proprietorship unless they have a close relationship with the owner. 

It’s only a corporation that makes it super easy to raise a lot of capital. This is especially the case if you take the company public. This means virtually anyone can buy a share in your company, which makes them a shareholder. 

Not So Hard or Complicated to Form a Corporation 

If you’ve never formed a corporation, you might think that it’s a complex task. 

Well, it is, if you’re a layman, but with professional help, it’s easy to start your own corporation. It’s not a process that will take you several days or even cost you a lot of money. In fact, there are several companies that will offer corporation services at an affordable fee. 

If you had resolved to start a sole proprietorship because you thought or felt forming a corporation is hard, we’re pleased to inform you that it’s not a tough job. You just need to ensure you have a business formation expert on your side. 

Tax Benefits 

There are two types of corporations: S and C corporation. 

For the purpose of tax benefits, this section dwells on S corporations. 

C corporations have double taxation, which isn’t what you want when your goal is to reap tax benefits. The C corporation must pay income taxes at the federal level, and shareholders will also pay tax on the income derived from dividends. 

On the other hand, an S corporation is a pass-through entity. The entity elects to pass on all tax obligations to the shareholders. 

It’s important to note that an S corporation isn’t really a type of business structure. It’s more of a tax classification. 

Forming a Corporation Has Significant Benefits 

Forming a corporation needs some work, but it offers significant benefits. Your business will gain credibility right from the start, you’ll get great personal liability protection, there are tax benefits, and it’s much easier to raise capital. 

Need more business tips and insights in incorporating? Visit the Finance section of the Bootstrap Business Blog to learn more about forming a corporation and enjoying the tax or liability reduction benefits.

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