Understanding the Benefits of Incorporating Your Business

Becoming an incorporated business has many advantages, including liability protection and ease of growth and transferability. However, incorporating a business requires payment of state franchise taxes, and fees to other professionals including attorneys and CPAs. If you are interested in incorporating your business, a corporate lawyer in San Jose can help you understand whether the benefits are worth the costs. Some of the most commonly cited benefits include:

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Liability protection
As a corporate lawyer can explain, the assets of the owners of an incorporated business will not be subject to the liabilities of the business if proper formalities are followed. The required formalities include everything from making sure that proper corporate governance procedures are followed and documented, to making sure that the owners keep their personal activities separate from the corporation’s activities. On-going review by a corporate attorney can help you make sure that the liabilities of the incorporated business stay with the business so that your personal assets are shielded from the liabilities of the business.

Tax Issues
Corporations face a myriad of tax issues, and resolving these issues often requires you to choose between a number of trade-offs. For example, the earnings of an “S corporation” are not taxed, for federal purposes, at the corporate level. The earnings of a “C corporation”, however, are taxed at the corporate level. That may make an S corporation the entity of choice until you realize that the number and type of shareholders, or owners, of an S corporation are limited. This can create impediments to accepting outside funding for the company. In addition, shareholders of an S corporation may be taxed on their share of corporate earnings, regardless of whether the corporation actually distributes them their share of those earnings. It is important to have a corporate attorney and CPA who work closely together to help you determine the best corporation for you and your business.

Outside Investment and Sale
Corporations are designed to raise capital, and to allow the owners to invest in the business whether or not they are actively involved. If your business will need outside capital to get started, or to grow, the corporation is usually the preferred type of entity to use. If you decide ultimately to sell your business, a “sale” of a corporation to another corporation can be accomplished in a manner that will defer any tax on the sale until such time as you receive cash for your business.