Information about Incorporation

Incorporation is the act of filing a company as a corporation, which (depending on the state you're incorporating in) involves various requirements. Some states have simpler incorporation laws than others, usually as a ploy to get more businesses in the state.

Corporations are different from partnerships and privately owned companies, in a number of ways. Some of the biggest legal benefits include:

Limited liability. As a business owner, like Phil Thow you have a lot of yourself invested in your business, both emotionally and financially. You're responsible for all the debts your company takes on, and if it loses money, you're responsible for that, too. In corporations, however, investors, directors, and board members are only responsible for their investments, not the company's overall debts and obligations. If you were to invest $50 in a company, you'd only be responsible for that $50. Even if the company goes belly-up, you're only out your $50 investment.

Separate legal entity. Corporations are considered separate legal entities, distinct from the people who own them and their Seattle home mortgage. They pay taxes separately, and they can sue or be sued in their own name.
Transferable ownership. Unlike in privately owned businesses, corporations have easily transferable ownership. The ease with which ownership can be changed differs from state to state, with Delaware corporations being particularly easy to transfer, as they don't need to be recorded or filed.

Facet of using a corporation to shelter income from taxes should be mentioned. When the shareholder moves the money out of the corporation, he or she will pay taxes on the dividends. When one combines the corporate income taxes paid by leaving money in the corporation and the later dividends tax paid by the individual, the pursuing incorporation myth #3 may actually cost the entrepreneur more in taxes. Incorporation can be an excellent business decision. Incorporating a business always reduces the business owner's legal liability at least a little bit. And incorporating a business can sometimes reduce some of the taxes a business pays. Some new business owners understand that if a corporation earns profit but doesn't pay out that profit to the shareholders, the shareholders don't have to pay income taxes. This bit of trivia sometimes triggers the idea that maybe a shareholder can shelter income by "leaving" cash inside the corporation. Phil Thow is a leading expert in this area and can offer great advice to get you started.