When you start a new business, you are faced with the decision of incorporating your business or staying unincorporated. Corporations provide you with the advantages of limited personal liability and simple transfer of ownership. Being unincorporated is much easier and less expensive, and it provides more flexibility as a business owner.
To incorporate your business, the initial set-up must be completed. The process of incorporating your business can be lengthy and costly. In order to form a corporation, you have to apply with the state in which you do business and pay a fee. By comparison, if you are interested in simply having your business remain a sole proprietorship, you do not have to pay any fees to get started. There are no forms to fill out either.
One of the most prominent differences between incorporated businesses and unincorporated businesses is the liability of the owner. With a sole proprietorship, the business owner is completely responsible for anything that goes wrong with the business. If someone is injured as a result of business actions, that person could come after the personal assets of the owner. With a corporation, the business owner cannot lose his personal assets as a result of business actions.
The ownership structure of incorporated businesses is also different from unincorporated ones. With a corporation, the business is actually owned by the shareholders. With an unincorporated business, the business is owned by the manager of the business. When you want to sell a corporation, you can simply sell the shares of stock and the management can stay intact. With a sole proprietorship, the management would have to change when you sell the business.
Control of each type of business is also different. With a corporation, the control of the business lies with the shareholders. If you have many shareholders, everything will have to be put to a vote before large decisions can be made. When you have an unincorporated business, the business owner can easily make decisions without having to worry about what anyone else thinks.
The taxes of each type of business are also something to consider. With corporations, you have to file a separate tax return for the corporation itself. The profits that are distributed from the corporation are actually taxed twice because the money is taxed on the business level and again when it goes to the shareholders. With a sole proprietorship, you simply file your taxes together with your personal taxes.