Advantages & disadvantages of incorporation

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A corporation is a legal body created by a single person or group who are shareholders in that body. This makes it separate from the shareholders. Incorporating a business is important, because it protects shareholders from debts or litigation. The corporation can conduct business, create contracts and sue and be sued--separate from the owners. There are several things to keep in mind when deciding whether or not to incorporate your business. Listed below are some advantages and disadvantages of incorporation.

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Advantages

A primary advantage is limited liability. This provides protection for owners. A corporation is an independent entity and limits the liability of shareholders and their personal assets.

Advantages

It is easy to transfer ownership in a corporation. As a separate body, ownership can change without affecting the business. If a current shareholder decides to sell her shares, the corporation continues with new ownership.

Advantages

It is much easier to raise new capital. The ability to issue shares is simplified for raising capital investments. The stock structure of a corporation is much more attractive to investors.

Advantages

There is a centralised management structure in a corporation. Shareholders elect a board of directors, which then elects the officers who run the business.

Disadvantages

There are many expenses to incorporate. You must pay fees when incorporating a business. Taxation also costs a corporation. The corporation itself pays taxes, then shareholders are taxed on their dividends.

Disadvantages

You must keep a staggering amount of records and reports. Reports and tax returns must be filed regularly and on time. Business bank accounts and records must be maintained and kept separate from personal accounts and assets, and records must be kept of corporate proceedings.

What's Next

Once you've decided to incorporate your business, you have some things to think about. If you're planning a for-profit business, you must choose a C or S corporation, or a Limited Liability Company (LLC). The main difference between a C and S corporation is profit taxation. The basic set-up procedures are the same.

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