Incorporate and What is Involved

Incorporation is one of any number of ways to structure a business. These include a limited liability company, an S-corporation and a C-corporation. Each structure has benefits and drawbacks, and it is important to decide which type of corporation works best for your situation, or if it makes sense to consider other options like operating without a corporation or working through an umbrella company. Understanding the options, however, is always a good place to start.

• A limited liability company, or LLC, can be very beneficial for small businesses or single person enterprises. The paperwork involved in establishing an LLC is much less extensive than either an S-corp or a C-corp. Requirements differ from state to state, but an LLC does not require stock to be issued or a board of directors.
  
• An S-corp is a smaller corporation that has a limited number of shareholders. One of the main benefits of an S-corp is that the profits from the company pass through the corporation to the partners. The partners pay taxes on the profits of the company on their personal income tax.
  
• A C-corp has no limits on size or type of shareholders. Any company that properly fills out the paperwork for incorporation and pays the incorporation fee can become a C-corp. A drawback of C-corps is that the business profits are taxed, and then the profits are paid to shareholders are taxed again. This leads many people to feel that C-corps suffer from double taxation.
  
• An umbrella company is a type of firm, sometimes called an employer of record, that provides a business infrastructure for you and is the legal entity you contract with clients through. The advantages of this type of situation vary by provider, but typically involve coverage under the group business insurances, simplified tax filing, access to benefits, and more. Legally speaking, under this type of arrangement you typically become a W-2 employee of the firm, however for operational purposes you still function like an independent contractor or consultant.

What are the Benefits of Incorporation?

There are a variety of reasons that a company would benefit from structuring itself as a corporation. The liability for the individual is reduced. Because a corporation sets the business apart from the individuals involved in the business, the partners are shielded from lawsuits and their personal assets are protected.

Another reason that someone may choose to incorporate is to reduce their tax burden. The structure of a corporation makes it much easier to track profits and losses and deduct business expenses. This reduces the tax that the partners must pay.

While it is difficult for many sole proprietorships to receive funding, a corporation, even if it consists of the same people, has a much easier time receiving money from investors or lending institutions. From another financial standpoint, a business that runs as a sole proprietorship is nearly impossible to sell, while a corporation is much easier.