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Why would a company choose to form as a corporation? What are

Resolved Question:

Why would a company choose to form as a corporation? What are the steps that are required to become a corporation? What are the advantages and disadvantages of the corporate form of doing business?
Submitted: 4 years ago.
Category: Tax
Expert:  Dave CPA replied 4 years ago.

Most business owners form corporations to protect themselves against financial and legal liabilities. In other words, a corporation keeps your business dealings, assets, and bank accounts separate from your personal assets.

Forming a corporation has many advantages.

Personal asset protection a both corporations and LLCs allow owners to separate and protect their personal assets. In a properly structured and managed company, owners should have limited liability for business debts and obligations.

Additional credibility; by adding "Inc." or "LLC" after your business name can add instant authority. Consumers, vendors, and partners may prefer to do business with an incorporated company.

Name protection because in most states, other businesses may not file your exact corporate or LLC name in the same state.

Perpetual existence because Corporations and LLCs continue to exist even if ownership or management changes. Sole proprietorships and partnerships just end if an owner dies or leaves the business.

Tax flexibility - Though profit and loss typically pass through an LLC and get reported on the personal income tax returns of owners, an LLC can also elect to be taxed as a corporation. Likewise, a corporation can avoid double taxation of corporate profits and dividends by electing Subchapter S tax status.

Deductible expenses - Both corporations and LLCs may deduct normal business expenses, including salaries, before they allocate income to owners.

Some of the disadvantages are

The process of incorporation requires more time and money than other forms of organization.

Corporations are monitored and subject to rules of entities: federal, state and some local, and therefore may have to meet many more requirements and administrative documents to demonstrate compliance.

The incorporation of a company could result in paying more taxes. Dividends paid to shareholders are not deductible as a business expense, so that such income may be subject to double taxation.

In order to from a corporation you must do the following:

Choose an available business name that complies with your state's corporation rules.

Appoint the initial directors of your corporation.

File formal paperwork, usually called "articles of incorporation," and pay a filing fee that ranges from $100 to $800, depending on the state where you incorporate.

Create corporate "bylaws," which lay out the operating rules for your corporation.

Hold the first meeting of the board of directors.

Issue stock certificates to the initial owners (shareholders) of the corporation.

Obtain any licenses and permits that are required for your business.

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