5 Advantages of Incorporation for Your Business

As a business owner, protecting what you’ve built matters. You want to keep both your company and your personal assets safe. You also want to reduce risks and create a strong future for your company. If you’re wondering how to do that, incorporating your company might be the answer. 

Incorporation is the legal process of turning a business into a “legal person” that’s separate from you. An incorporated business can own property, pay taxes, and sign contracts under its own name. It can also borrow money and be legally responsible for itself.

That separation helps protect you from personal liability if your business runs into legal or financial problems. Instead of everything falling on you, the business handles its own obligations, so it’s good for both you and your business.

Let’s look at the many advantages of incorporation. Understanding them can help you decide if incorporating your business is right for you.  

1. Protect your personal assets with incorporation

Liability protection means that business creditors and people bringing lawsuits can't come after you personally. That’s a great way to protect yourself, and you can get it through incorporation. 

When businesses get into trouble, their owners could lose everything. But, there's a way to keep that from happening. Incorporating and operating your business according to law creates a “corporate veil.” This legal barrier usually keeps your personal assets safe, including:

• Your main home and other real estate
• Personal bank and investment accounts
• Personal vehicles and boats
• Retirement accounts
• Personal property

Suppose someone sues your corporation. You shouldn’t lose your home and other personal belongings. Only your business should be responsible, not you.

2. Maximize tax savings and deductions

Incorporation lets businesses choose their tax structure, which could help them select the most beneficial one for their situation. 

Let’s look at some corporate tax structures:

• C-corporation: Pays its own taxes, corporate tax rates might be lower
• S-corporation: Owners pay tax on profits themselves, avoiding double taxation
• Disregarded entity: This tax structure is only available to limited liability companies (LLC). If you want to read more about LLC tax classifications, go 

Take advantage of deductions and retained earnings

Another benefit of forming a corporation for tax purposes is that you can deduct lots of business expenses. That means a lower taxable income and an improved cash flow. Those deductions may include:

• Employee health insurance premiums
• Business travel and lodging
• Advertising and marketing costs
• Equipment and office supplies

Also, you can leave profits in the company instead of taking them as personal income. Keeping those retained earnings in your company is a great strategy for delaying personal income tax liabilities. It also gives you funds for growing your company.

3. Access capital and fuel business growth

At some point, your business will probably need to borrow money or raise capital. Banks and other lenders may seek stock as collateral. Investors may want stock in return for their investment. Corporations have more formal recordkeeping and the ability to issue different types of stock, which may be more enticing to banks and investors. 

4. Ensure business continuity and perpetual existence

A corporation has a life of its own. If an owner leaves, retires, or passes away, the business can keep operating. Ownership changes don’t necessarily mean the company pauses or dissolves. 

Business continuity is important because it could help you:

• Reduce financial losses
• Protect employees
• Identify and prepare for risks
• Protect your company’s reputation
• Build customer trust
• Reassure vendors

Incorporating means ownership changes don’t have to affect the company. It makes long-term planning easier because the business can last even without your involvement.

5. Transfer ownership without interrupting business

Seamless transfers can prevent lots of problems. Due to a corporation’s recordkeeping requirements, stock transfers are very formal and should be well-documented. This can prevent ownership questions down the line.   

You might also want to pass company ownership to your children. You can use a Will or Trust to transfer your shares of stock. You also may be able to prepare a Transfer on Death (TOD) to leave them your shares and have them transfer without probate. 

Key considerations before you incorporate

It’s important to weigh the pros and cons of incorporation before you make a decision. We’ve talked about why you should incorporate your small business, but let’s look at some possible concerns:

• State filing fees for corporations can be high
• You’ll have to file annual reports and pay a yearly renewal fee
• Procedures are more formal than with other business structures; for example, you’ll need to hold corporate meetings and keep official minutes
• Stock transfers and stock certificates must be recorded
• You’ll need many additional levels of ownership and operating management, such as Shareholders, Board of Directors, and Officers

How to get professional help with incorporation

Incorporation is a great way to protect yourself and your company. The benefits can make the extra responsibilities worth it. Deciding to incorporate is a big decision, and you may want to ask a lawyer for advice.  

LegalShield®  Business Plans make it easy for you to get solid legal advice for a reasonable price. Your membership gives you access to a provider law firm for document reviews, contract concerns, and more. Get the guidance you need to start protecting your business today.