A corporation is a legal entity that is separate from the individual or individuals who own its stock. Thus, a corporation provides asset protection for its stockholders. In contrast to limited partnerships and LLCs, which are often formed to hold assets, corporations are usually formed to run a business. Almost every professional and businessperson should operate as a corporation because corporations and their stockholders enjoy certain protections under the law and important benefits, such as:

  • Personal liability protection. If you operate your business as a sole proprietorship or general partnership, you are personally liable for any business debts or lawsuits against your business. Almost anything you own can be at risk. As the owner of stock in a corporation, on the other hand, once you have incorporated and complied with the corporate legal formalities, your personal assets should be protected from any liability or other obligation incurred by your business. For example, if your corporation gets sued and is forced into bankruptcy, owners will usually not be required to pay the debt with your own money. If the assets of the corporation are not enough to cover the debts, in most cases, the creditors cannot go after the stockholders, directors, or officers of the corporation to recover any shortfall.
  • Save on taxes. Your corporation could be taxed at a lower rate than you personally and your corporation may be entitled to business tax deductions that it might not be otherwise if it were operated as a sole proprietorship or general partnership.
  • Ability to structure an asset-protected corporate retirement plan. This is true even for a corporation with one stockholder.
  • Attract business partners or investors. Potential business partners and investors would be more likely to buy into your company because they will know they are protected from liability by virtue of your corporate status.
  • Transfer ownership easily. Incorporation allows you to transfer ownership through the simple sale of stock.
  • Ensure continuity. Corporations are enduring business entities that have a business life extending beyond an owner, principal, or partner. Incorporating avoids any legal consequence or even dissolution of the business in the event of long-term disability or death.
No business is too small to incorporate. Even if you are the sole owner and employee, you owe it to yourself to take advantage of the tax savings and the liability protection afforded by incorporation. Furthermore, Collins Law Corporation makes incorporating affordable and helps minimize the task of complying with the required corporate formalities. The minimal costs to get started are well worth the peace of mind of knowing you have liability protection for your personal assets.

One major disadvantage of a traditional corporation is double taxation. A traditional corporation, known as a C corporation, pays a corporate tax on its corporate income (the first tax). When the C corporation distributes profits to its stockholders, the stockholders pay income tax on those dividends (the second tax). To avoid double taxation, corporations can make a special election to be taxed as a pass-through entity, like a partnership or a sole proprietorship. Then there is only one level of taxation. The corporate profits pass through to the owners, who pay taxes on the profits at their individual tax rates. Corporations that make this tax election with the IRS are known as S corporations.

There are numerous factors to consider when choosing what kind of entity to form. Also, if you decide to incorporate, carefully drafted Articles of Incorporation, corporate bylaws, minutes, and, if applicable, shareholder agreements and buy-sell agreements are critical to ensure the objectives for forming the corporation are met. Contact Collins Law Corporation to discuss your entity formation options and protect personal assets today.