Many entrepreneurs think that only very large companies are formed as corporations. But there are a significant number of new small businesses that are incorporated. One of the reasons for this is personal liability protection.
A sole proprietorship simply does not provide any barrier between business actions and personal consequences. But individuals are insulated from most legal liabilities that occur as a consequence of business procedures conducted by a corporation.
In addition, raising money from outsiders is easier for a corporation. Investors can receive shares of an incorporated entity representing ownership. The company founders still control management decisions. However, by granting equity to investors, there is no burden of debt repayment. An entrepreneur should be more concerned about this cash flow issue than ownership percentages. Without cash flow to grow, there’s no business worth owning.
There are more proprietorships than corporations in the US. This is probably because a proprietorship is established by default but a corporation takes some extra steps. Fortunately, there are professional services to assist you in correctly implementing a new corporation.
Since a corporation is a separate legal entity from any individual, there are specific filing documents required to create it. Each state has an agency to govern the process of forming a corporate structure. Using an incorporation service is easier and less expensive than ever before. This assures that you complete the process correctly.
You also need some advice from an accountant or financial adviser possessing experience with new corporations. First, there is a decision to make about federal tax status as either a C corporation or an S corporation. Then, an accounting system is needed for this separate legal entity. There are also filing requirements for state taxes or licenses.
In addition, you need advice about procedures to follow for maintaining your corporate business structure. The state of incorporation generally requires filing updates about changes in address, registered agent, or shareholders. Even if the corporation is not subject to any state taxes, there is usually a requirement to file certain annual forms.
The cost of correctly forming a corporation is well worth the results. Using services to accurately establish a corporation permits a small business owner to have legal protection, tax advantages, and improved ability to finance operations.