Starting a new business is scary enough without worrying about risking your life savings or your house if your business gets sued. Incorporating may be the most costly and time-consuming form of business structure, but the primary reason business owners choose to do it is for the financial and legal protection it offers.
Incorporation has nothing to do with the size of your business—and everything to do with shielding yourself from the risks of business ownership because it creates an entity separate from yourself, with a life of its own in the eyes of the court (and the Internal Revenue Service). As a separate entity, a corporation is responsible for its own debts and taxes. The owner and shareholders (if any) are responsible only for their investments; they pay taxes only if dividends are paid out. Corporations can offer tax-deductible benefits such as health insurance, life insurance and retirement plans, and can deduct costs such as business travel and entertainment.
There are two primary forms of incorporation: C corporation and S corporation. The main difference is how taxes are paid. A C corp pays federal income tax, but any dividends paid to shareholders are also taxed. An S corp pays no federal income taxes; instead, the business’s income and losses pass through to the shareholders, who report them on their personal tax returns. There are some other differences, too, so talk to your accountant to determine which is best for you.
—Rieva Lesonsky,best-selling author,CEO of GrowBiz Media and SmallBizDaily.com