Most new businesses start with no thought about legal structure. In the eyes of the IRS, the default structure is a “sole proprietor,” in which your business profits are taxed on your personal tax return. This can serve you well to start, but there are several reasons you may want to consider incorporating as your business grows.
- To protect your personal assets from creditors. When you operate your business within a corporation, creditors are often limited to corporate assets to satisfy a debt. Your home, savings, and retirement accounts are no longer fair game.
- To provide a personal liability firewall. The corporate form can help protect you against claims made by others for injuries or losses arising from actions of your business.
- To issue shares of stock. You can help build your business by issuing shares to new investors, or by offering stock options to key employees as a form of compensation.
- To gain tax flexibility. A corporation can provide you with more tax flexibility. Deliberate planning can help optimize the taxable division between corporate income, dividends, and your personal wages.
- To enhance your business presence. Being incorporated sends a signal that your business is a serious enterprise, and it could open doors to opportunities not offered to sole proprietors. Consumers, vendors and other businesses often prefer to do business with incorporated companies.