Pros & Cons of Incorporating a Business

by KJ Henderson, studioD

Starting a business is an exciting prospect. The satisfaction of seeing a dream and hard work come to fruition is just one reason why many entrepreneurs set out each day. A small business owner must decide if incorporation is the best structure for his new business entity. There are several benefits to incorporating, and there are disadvantages. An entrepreneur must weigh the pros and cons carefully to make the most appropriate decision.

Pro: Limited Liability

One of the biggest advantages to incorporating a business is the limited liability that the owners are afforded. The government considers a corporation to be a legal entity. Any debt it incurs and any revenue it generates belong to it and it alone, not the owners. As a result, any claims against the assets of a corporation are not the responsibility of its shareholders. For example, if a business defaults on a loan, its owners are not personally responsible for repayment. In the event that the business must file for bankruptcy protection, the owners’ finances are not personally affected.

Con: Paperwork

Establishing and maintaining a corporation requires a lot of paperwork. Beginning with the new entity's articles of incorporation, the owners must meticulously document all major activity and transactions made by the corporation. This includes board meetings, management conferences and shareholder meetings. Financial transactions must also be recorded in detail, as corporations must file income tax returns. These documents are more complex than those for other business structures. In addition to federal requirements, each state has its own guidelines regarding the record keeping activities of incorporated businesses within its jurisdiction. These regulations must be followed for the company to remain "in good standing" with the law, reports Smart Pros.

Pro and Con: Taxes

Depending upon an organization's size, there are advantages and disadvantages to the way corporations are taxed. By incorporating, a business is eligible to claim a greater amount of tax deductions than it otherwise would. Salaries, incentive compensation and fringe benefits are just a few items that are deductible on a corporation’s tax return. On the other hand, corporations, unlike other business structures, must file income tax returns. This may not be in an issue for a large organization but may be costly to small ones. If a one-person business incorporates, any revenue that the owner generates is taxed twice, first at the corporate level and again on his personal income tax returns.

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