The corporation has been described as one of the great inventions of mankind. An entity on its own, the corporation exists separate from the personal fortunes of its founders, can pass from their hands intact, and may even outlive them. It pays its own taxes, can be sued in its own name and may have many owners in the form of shareholders over time.
There are many advantages of doing business in this structure. So, let’s look at the top 10 reasons to set up a corporation.
1. Protection from liability
This probably ranks number one among the top 10 reasons to set up a corporation because of the limited liability that the corporate structure affords its owners. Theoretically, the corporation is responsible for its debts and obligations. This benefit is not absolute though and has boundaries. The corporate veil may be pierced under certain circumstances and shareholders of a new or small corporation may be asked to give personal guarantees when trying to obtain financing.
2. Ability to Raise Capital
One of the top 10 reasons to set up a corporation is the increased ability to raise capital, when compared to a sole proprietorship or partnerships. Outside investors may be enticed by the tax benefits and limited liability offered by corporations. The flexible nature of the capital structure in corporations allows them to address a wide variety of investors with varying needs.
3. Choice of Tax Year
Tax law allows corporations (except S corporations) to freely choose their fiscal tax year, which may be different from the calendar year. The corporation can select the tax year most advantageous to the business and most appropriate a fit to its natural business cycle.
4. Business Continuity
This is not too obvious a benefit but certainly important enough to be one of the top 10 reasons to set up a corporation. The corporation can survive its founders provided that it complies with state and federal regulations.
5. Centralized Management
Shareholders in the corporation possess the right to vote for and determine the board of directors of the corporation, who in turn elect the officers of the corporation. This affords control.
6. Transferability of Ownership
In contrast to the other forms of business entity, the ownership interest of a corporation is easily transferred. Barring any prohibitive agreement among shareholders, or restrictions in the articles of incorporation or bylaws, shares of stock may be bought and sold freely.
7. Corporate Identity
Shareholders benefit from the sense of image and stability of a corporation.
8. Tax Savings
Corporations are taxed at a lower rate than individuals. They can own shares in other corporations and receive corporate dividends 80% tax free. This is certainly one of the top 10 reasons to set up a corporation.
9. Less Risk of IRS Audit
The probabilities of IRS audits on corporations are lower than on individuals, and disallowances are likely to be less.
10. Employee Benefit Plans
The last, but not the least of the top 10 reasons to set up a corporation, can be found in employee benefit plans. The owners of a corporation may be in a position to take advantage of several IRS-qualified employee benefit plans that can be used both to compensate employees and to reduce the corporate income tax liability. Payment to these benefits gives the corporation a tax deduction and the shareholders may receive favorable tax treatment on the dividends arising from it.