Reasons to Incorporate

by Christopher Carter, Demand Media
Incorporate your business for many reasons.

Incorporate your business for many reasons.

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Incorporating is a major decision that will affect many aspects of your business. Forming a corporation has distinct advantages and disadvantages. Corporations can be classified as a C corporation or as an S corporation. One of the main distinctions between the two is C corporations are larger, having 75 or more stockholders. S corporations are smaller and have fewer than 75 stockholders. The process of forming a corporation is the most involved of all the business entity types. The costs to incorporate your business vary from state to state.

Asset Protection

One of the primary reasons businesses incorporate is to protect the personal assets of the owners. When you incorporate your business, a separate legal entity is formed. This means your business can accumulate assets and debts, separate from your personal assets and debts.

In addition, incorporating your business is helpful in terms of reducing your liability. For example, if your business gets sued by a creditor or other third party, your risk of losing your house or personal assets is greatly reduced compared to a sole proprietor. In most cases, the extent that creditors can go to receive payment is limited to your ownership interest in the business.

Raising Capital

When you incorporate your business, it becomes much easier to raise money for your business needs. Borrowing funds from banks or other financial institutions is usually easier for corporations than sole proprietors. As a separate legal entity, the credit worthiness of the corporation is in question, as opposed to a sole proprietorship, where the individual's credit worthiness is assessed.

Corporations are the only entity with the ability to issue stock. This makes it easier for corporations to raise money, compared to other business types. Corporations may issue stock to finance various business ventures or to pay down company debt.

Furthermore, C corporations have the ability to issue more than one type of stock. For example, a corporation may issue common stock and preferred stock. It is important to mention that S corporations don't enjoy the same luxury. S corporations are allowed the issuance of one type of stock.

Tax Considerations

While corporations may fall victim to double taxation, there are other tax considerations that make forming a corporation a worthwhile act. For example, if your corporation has employees, you will be able to write off the cost of providing your employees with health benefits.

As a corporation, your business may carry forward or carry back an unlimited amount of operating losses. In some instances, corporation taxes on profits may be less than your personal income tax bracket. Salaries, bonuses, operating expenses and advertising costs are examples of tax deductions enjoyed by many corporations.

Unlimited Life

Most business entities have a date of dissolution or, as in the case of a sole proprietor, cease to exist when the owner dies. Corporations have unlimited life. In fact, corporations can last for centuries, long after the founders of the company have passed on.

In addition, it is much easier for corporations to sell ownership interests when compared to other business entities. For example, if you're a member of a limited liability company, you must get approval from other members before selling your ownership interest. In a corporation, you can buy and sell shares at your own discretion.


Forming a corporation adds credibility to your business. Clients and customers of your business may look on your corporation status more favorably than other forms of business. Incorporating your business may signal to your clients that you're not a "fly by night" operation.

Incorporating your business adds an air of professionalism and makes your company look more legitimate in the eyes of many clients and customers.

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