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Benefits of a Corporation

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Forming a corporation is an important step for small business owners, and taking this step has many possible benefits for the business and its owners (who are also called shareholders). These benefits are, in many cases, unavailable to sole proprietorships and general partnerships.

Incorporation benefits include:

Limited Liability - Corporations provide limited liability protection to its owners. Typically, the owners are not personally responsible for the debts and liabilities of the business; thus, creditors cannot pursue owners’ personal assets (such as a house or car) to pay business debts. Conversely, in a sole proprietorship or general partnership, owners and the business are legally considered the same and personal assets can be used to pay business debts.

Tax Advantages - Corporations often gain tax advantages such as: the deductibility of health insurance premiums paid on behalf of an owner-employee; savings on self-employment taxes, as corporate income is not subject to Social Security, Workers Compensation and Medicare taxes; and the deductibility of other expenses such as life insurance. For information on the types of tax advantages your business may gain by forming as a corporation, please speak with an accountant or tax advisor.

Establishing Credibility - Incorporating may help a new business establish credibility with potential customers, employees, vendors, and partners.

Unlimited Life - A corporation’s life is not dependent upon its owners. A corporation possesses the feature of unlimited life, meaning if an owner dies or wishes to sell his or her interest, the corporation will continue to exist and do business.

Transferability of Ownership - Ownership in a corporation is typically easily transferable. (However, there are restrictions on S corporation ownership.)

Raising Capital - Capital can be raised more easily through the sale of stock. Additionally, many banks, when providing a small business loan, want the borrower to be an incorporated business.

Retirement Plans - Retirement funds and qualified retirements plans, such as a 401(k), may be established more easily.

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