Incorporation

This might have been just a little bit obvious, but Corporation is in our name so you have to expect at least a few posts about the topic. We’ve done a C is for C-Corp already that explored the benefits of that particular business structure, but what about incorporation in general? Why put in the effort? What does it offer a small businesses?

There are multiple types of structures that can be created through incorporation.

The most popular class of corporation is definitely the C-Corp. Creating a C-Corp creates a separate, legal entity. That means it gets a wage and it has to pay taxes. It can then distribute what is left of its income to its shareholders. However, shareholders still have to pay tax, which means that the income a C-Corp earns, and then passes on, might be taxed twice. So some states offer the option to form an S-Corp, which allows all income to pass through the corporation and to the shareholders. The shareholders still have to pay their income tax, but the corporation does not.

There is also a new type of corporation in certain states called a B-Corp, or Benefit Corporation. Like all corporations, it has a board of directors and shareholders who are all involved in making decisions. And, typically, the officers and directors of a business must always try and make a profit for its shareholders. A B-Corp allows those directors and officers to also take public good into consideration when making decisions. Social benefit and environmental impact then become acceptable, defendable considerations. A B-Corp can raise capital, but the owners do not have to worry that their business might not be able to uphold its mission to increase the public good.

Incorporating can allow you to raise money by selling stock

It is very easy to attract investors to your business if you incorporate. Essentially you sell of little bits of your company to investors, who then get a say in how things are run, dependent on how much of your company they now own. So you lose some control, but the business is able to raise capital without acquiring any new debt, like it would if it took out a loan. Depending on what your business is, and how profitable it is predicted to be, selling shares in your company can bring in a lot more money. Plus C-Corps can have an unlimited amount of shareholders, and that can mean a lot to a business looking to eventually offer stock publicly.

Incorporation protects your personal assets

Just like with any structure that turns your business into a separate legal entity, incorporating protects your personal assets. Your business has its own debts and income, and you have your own debts and income. As long as you do not give a personal guarantee when taking out a loan for your business, you still are protected by a limited liability. If the business doesn’t work out, it won’t take you out with it. And, if for whatever reason you can no longer run the business, it is simple enough to transfer or sell your share of the company. The business will continue on until the shareholders and directors choose to dissolve it.

There are many things that should be considered before taking the steps to incorporate your business – the amount of money your business makes, how much it holds in assets, the states in which you want to incorporate and do business in. You should also look into forming a Limited Liability Company. It offers many of the benefits of an incorporation and is slightly less complicated to create and maintain. So talk things over with an accountant or other professional before doing anything. However, if you decide that the benefits of incorporating outweigh the disadvantages, an incorporation offers your business a strong, steady, time-tested legal structure.