What is the reason to incorporate a business?

Incorporating is one of the best ways a business owner can protect his or her personal assets. Most people choose to incorporate solely for this reason, but there are other advantages as well. For example, the corporate business structure saves you money in taxes, provides greater business flexibility, avoids audit chances, better itemization and lets you more easily raise capital.

There are many advantages to incorporate your business. Liability protection of your personal assets is one of the primary reasons why a small business will form a corporation. Incorporating helps to separate your personal assets from that of your business. A corporation is a legal entity that exists separately from its owners or shareholders. Typically, shareholders are not liable for the debts and obligations of the corporation or from any litigation where the corporation is the defendant in most cases. In a partnership or sole proprietorship, the creditors can go after the owner's personal assets if the company assets are not enough to settle a claim in most cases.

In company registration or corporation formation, prospective shareholders exchange money, property, or both, for the corporation's capital stock. A corporation generally takes the same deductions as a sole proprietorship to figure its taxable income. A corporation can also take special deductions for federal income tax purposes; a Corporation is recognized as a separate taxpaying entity. Corporation conducts business, realizes net income or loss, pays taxes and distributes profits to shareholders.

The profit of a Corporation is taxed to the corporation when earned, and then is taxed to the shareholders when distributed as dividends. This creates a double tax. The corporation does not get a tax deduction when it distributes dividends to shareholders. Shareholders cannot deduct any loss of the corporation.