The easiest way to start your own business is to run it as a sole proprietorship. However, just because this is easier — and cheaper — to get up and running doesn’t mean it will save you money in the long run. In many cases, it could be well-worth your time and investment to create a corporation.
The primary difference between a corporation and a sole proprietorship is the fact that your corporation will function as an independent tax and legal entity. In other words, the corporation will file its own tax returns on the profits it generates. Meanwhile, you will only pay personal income taxes on the money the business pays you as income.
What are the benefits of a corporation?
There are many benefits to setting up a corporate entity and running your business through this entity. Here are some of the most important that you might want to consider:
Liability protection: A corporation can shield you from debt and other financial liabilities as long as you follow a series of rules and business formalities in the way you organize your financial affairs.
Lower taxes: As mentioned above, business owners can save money on personal taxes by running their company’s financial affairs through a corporate entity. Corporations pay lower income taxes than individuals. This allows someone to pay a lower tax rate on corporate earnings, and only pay the higher personal tax rate on money withdrawn as income.
Investment capital: Corporations can issue stock shares, and this is a great way to gather additional capital to invest in one’s business.
A clear power structure: The corporate business model comes with a clear management structure that includes shareholders, officers and directors. Each piece of this power structure has clear responsibilities to carry out within your business. This can help your business stay organized in a way that achieves a higher level of success.
Employee stock benefits and stock options: Corporations can attract top talent by offering employees stock options and stock benefits packages.
Are you ready to create a corporation?
Setting up a corporation isn’t entirely difficult, but company owners should take care to organize their companies strategically and in a legally appropriate fashion. The time and resources you invest into a sound corporate plan could yield great dividends in the years ahead.