Corporation and LLC FAQ

Why should a business owner consider forming a corporation or LLC?

The most common reason for forming a corporation or LLC is limited liability.  The corporation or LLC exists as a separate entity from the owners, and the owners are not liable for actions of the corporation in most cases.  Additionally, corporations and LLCs have an unlimited life in that the corporation or LLC does not terminate upon the owner’s death or disability.  Corporations and LLCs also facilitate the transfer of ownership interests to employees, investors and heirs.  As such, the transferability of shares is helpful in raising capital and estate planning.

What are the advantages of incorporating a business?

The advantages of incorporating a business include:

• Corporations have a reliable body of legal precedent to guide owners and managers.
• Corporations are the best vehicle for eventual public companies.
• Corporations can more easily raise capital through the sale of securities.
• Corporations can easily transfer ownership through the transfer of securities.
• Corporations can have an unlimited life.
• Corporations can create tax benefits under certain circumstances, but note that C corporations may be subject to "double taxation" on profits. To avoid this, many business owners elect to operate their corporations under subchapter S of the Internal Code. Also known as an S corporation, this entity allows income to pass through to the individual shareholders.

What are the disadvantages of incorporating a business?

The disadvantages of incorporating a business include:

• Corporations require annual meetings and require owners and directors to observe certain formalities.
• Corporations are more expensive to set up than partnerships and sole proprietorships.
• Corporations require periodic filings with the state and annual fees.