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Mark Briggs: Advantages and Disadvantages to Incorporating
Incorporating a business affords the business’ owners with various advantages, a fact which has practically made the process of incorporation automatic for new business owners. However, there are also some little known disadvantages to incorporating which may cause a business owner to think twice. Here we will review the advantages and disadvantages to incorporating a business.
- Protection of personal assets.An incorporated business provides asset protection for its shareholders. Generally speaking, business owners (and shareholders) of an incorporated business cannot be held personally liable for the debts (and other liabilities) of the business.
- Separation of assets and funds.Even if a corporation is 100% held and operated by a single person, incorporating can provide the business owner with a convenient way to keep his or her personal assets separate from his or her business’ assets.
- Facilitation of the process of attracting investors.Incorporation is the only business class which can raise and issue stock to investors. This feature makes it easier and more secure for investors to invest funds in exchange for a percentage of the company.
- Tax disadvantages.Corporations are responsible for paying taxes. This becomes a disadvantage when the owners of the business must pay personal taxes on the dividends they receive from the corporation, which may have already paid corporate taxes on the same earnings. This disadvantage is often referred to as ‘double taxation’.
- Strict recording and reporting formalities.Incorporating a business requires submitting a filing in the state in which the business will be incorporated. Furthermore, corporations must conduct annual meetings in the state in which the business is incorporated, and even keep an account of the minutes of the meeting.
Incorporating a business may seem like a common sense decision for any serious business owner. Incorporating allows the business owner to protect his or her personal property from the business’ liabilities, and facilitates the process of investing in the business. But, there are drawbacks to incorporating including the possibility of double taxation and having to follow relatively strict recording and reporting guidelines.