Incorporated means a company acts as a distinct legal entity with a separate existence from the owners of the business. Incorporating a business produces significant legal advantages for the owners of the business. An incorporated business has tax-related disadvantages.
When a business incorporates, its owners gain limited liability protection from the company's debts and obligations. A shareholder in a corporation does not lose his home and other personal valuables, unless he offers a personal guarantee to pay a business obligation. A shareholder's liability does not exceed the amount of cash or property she has invested in the company. Also, a shareholder's personal creditors cannot take assets from the business as compensation for her personal obligations and liabilities
As a corporate entity, you can raise money by offering stock to potential investors. The proceeds from stock sales can be used to expand the business or pay existing obligations. An incorporated business can raise even more money by taking the company public, whereby its stock is bought and sold freely on NASDAQ and the New York Stock Exchange. An incorporated business attracts investors more easily than other entities because of the company's limited liability status. Also, a corporation has the advantage of using stock options as compensation to lure talented job candidates.
Establishing a corporate entity lends credibility to the business. Customers, vendors and suppliers may feel more comfortable doing business with a business owner who uses "incorporation" or "corporation" in her company's name. This signals that the company is not a "fly-by-night" business and that, as a corporation, is stringently regulated by state laws. For instance, corporations are required to hold at least one meeting every year and must record minutes that detail how the company makes decisions. Corporations also have to file annual reports in each state where their transactions occur, and create financial statements indicating their financial position on a specific date.
Corporations encounter a large tax disadvantage known as double taxation. An incorporated business must pay tax on the company's net income, after business deductions, at the entity level. The Internal Revenue Service taxes a corporation's profits at the company's corporate tax rate. The second tax is owed when shareholders receive dividends from the corporation. A shareholder must report dividends received from the business on her individual or joint income tax return.