Starting a business is not easy. There are many decisions to be made and research to be done. Such as whether or not you need partners, what kind of growth will you expect. In this article we will be introducing you to incorporating a business, and all the benefits and limitations that go with it.
There are several types of business entities out there, and your new business will have to assume one of these forms. Depending on which type you choose, your obligations to the federal government will differ.
One entity is called the “corporation". Most people think corporations are large and wealthy. They see hundreds of employees wearing smart business suits working in a large building and lots of dollars rolling in.
It is quite ambitious to incorporate your business, as they are viewed and governed differently by the government. They are also anchored in the state where they are registered, however that doesn't stop you branching out to other places.
Corporations differ from other business entities as there is no one specific owner. Rather corporations are owned by shareholders as these people all have a share in the company. However shareholders do not run the company, they appoint a group of people known as the Board of Directors to make executive decisions and major policies that govern the company on a daily basis.
The process of becoming an incorporated business is a sticky one involving many processes. State and federal agencies monitor corporations closely to make sure they operate within the law. Although this may seem limiting, but there are also benefits to incorporating a business. Firstly shareholders of a company have limited liability for whatever the corporation does. If the corporation is sued or in debt, you as a share holder is only liable to whatever you invested in the corporation in the first place. Depending on the circumstances, the board of directors are more accountable than the company shareholders.
Another benefit of corporations is that they don't have to borrow from the bank to raise fund, this can be done by distributing stock. Selling stocks allow them to keep the company from floundering and have adequate cash flow to make it through a crisis situation.
There are also more choices available to a corporation when it comes to taxation. For one a corporation can deduct the amount of money spent on benefits of employees and company officers.
Further, corporations can file for an S corporation which means that any share holder and file their earnings and profits from the company as distribution on their taxes. Meaning shareholders are employees too, and they will pay themselves from the money they plan to claim as a distribution. This amount must be a reasonable compensation. The benefit in doing this, is that the employees pay taxes on only a portion of the money as their personal income tax, and hence the corporation won't need to pay tax on the entire amount.
There are many benefits to registering an incorporated company when you're starting a business. There are also many laws and limitations governing an incorporated company. So before you decide, you should research on what type of business suits you best.
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