James R. Kay, CPA

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Should You Incorporate Your Business?

Generally, business owners face three major considerations in deciding whether to incorporate.

Limited liability for corporate debts and court judgments.

  • Banks and leasing companies will many times require the owners of small businesses to personally guarantee the repayment of loans and leases.   However, there are many other kinds of debts and potential liabilities that owners can shield themselves from if the business is operated within a corporation.   This protection from personal liability is called the corporate shield.  Owners do not want to loose their personal assets if the business fails.  They may loose their investment in the company but their personal assets can be shielded from the claims of others if the business is incorporated.
  • If you have employees, they are your agents.  You can be held personally responsible  for most, if not all, of their actions.  If you incorporate, those employees become agents of the corporation.  The corporation then must answer for their actions, not you personally.
  • If you operate in a risky environment, for example around machinery, vehicles, or in high crime areas, then limiting liability can be especially important.

Corporations enjoy the most favorable tax treatment in areas of employee health benefits and retirement plans.  Reducing income taxes and the ever-present social security tax is much easier in a corporation.  Expenses that are considered personal for a sole-proprietor become business expenses in a corporation.  These benefits are generally more favorable in a C-corporation as opposed to an S-corporation.

Corporations appear more legitimate in the eyes of bankers, customers and vendors.  If you have a corporation it's almost a given that you are receiving professional advice from an attorney and a CPA.  Good advice increases your chances for success.  Those you do business with are interested in your success.  If you are successful you will be able to repay obligations, deliver products and provide services well into the future.  A corporation even looks more legitimate to the Internal Revenue Service.  Sole proprietorships are a favorite target of IRS auditors and have a much higher chance of being selected for an audit than a corporation.

What form of organization is best for my business?

Choosing the right form of organization can be a very simple choice for some businesses.  For others it can be very critical.  Many times it depends upon the type of assets you intend to put in the business.  It may depend upon the prospects of selling the business assets in the future for a substantial profit.  Franchise tax issues are also an over-riding concern.  You don't want to make the State of Texas a 4.5% partner in your business if you avoid it.

Caution - The discussion on this page is general in nature and is not intended to be legal advice.  Always seek the advice of a tax professional and/or attorney when contemplating decisions of this nature.

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