How to Incorporate a Business
Setting up a corporate legal structure for business is more complex and expensive than any other kind of business. One of the main features of the Corporation is that the corporation has its own legal identity which is separate from that of the business owner. For this reason the process of setting up the corporate identity needs a more complicated process for compliance with regulations and tax requirements.
The biggest outcome of setting up legal structure for an incorporated business is that of liability protection. Since the business has a separate legal identity, the debt of the business and corporation is not considered that of the owner. Technically speaking, you are not going to be held personally liable with your own personal assets of the debts and legal claims of the Corporation. A corporation can also retain some of its profit without the owner paying income tax on them.
You will probably experience ease with finding funding for business when it is set up as a corporation. Not only does borrowing money from banks and lending institutions become easier but other options for raising money also open up such as selling stock, either common or preferred. A corporation can also continue indefinitely and does not have to cease or dissolve with the death of a shareholder or if the shareholder sells the shares or becomes otherwise nonfunctional.
The laws governing the setup of the Corporation may differ from one state to another. You will most definitely need the assistance and professional help of an attorney to set up a corporation. In order to set up Corporation one must follow more complex rules and regulations than a partnership or sole proprietorship. It also requires adherence to guidelines regarding accounting and tax preparation. For all these reasons the cost of creating a Corporation is quite high.
Another drawback to setting up a corporation is that the owners of the corporation have to pay a double tax on business earnings. Earnings of the Corporation are subject to corporate income tax at both the federal and state levels but any earnings distributed to the shareholders in, dividends are also taxed at the individual level on their personal income tax returns.
One strategy that can be adapted to soften the blow of double taxation is to pay some money out as salary to you and other major corporate shareholders work for the company. A corporation is not required to pay tax on earning paid as reasonable compensation and can deduct the payments as business expense. However, the Internal Revenue Service set limits and regulations on what it considers to be reasonable compensation.