Here is the summary of benefits incorporating:
§ Corporation is a separate entity and it is separate from the owners.
§ Shareholders are not liable for corporation’s debts unless they have given personal guarantee. It limits the liability of shareholders and their personal assets.
§ Small business corporations have lower tax levels than individual tax brackets. There is also tax deferral until the income is paid out.
§ It is easier to estate planning if the business is corporation.
§ There are some special tax incentives available to corporations as opposed to individuals. These include
Ø Ability to manage personal tax rates through salary & dividend mix.
Ø Access to the personal capital gains exemption.
Here is summary of disadvantages incorporating:
§ Corporate tax returns need to be filed and those may not be easy without help from an accountant.
§ Records of corporations have to be maintained.
§ There is an initial cost to incorporate a corporation.
§ Most new businesses have losses in their first few years. The losses can not be offset again other personal income. Rather the losses will be retained by the corporation and can be used against future corporate income.
§ Investments held inside in the corporation are subject to tax rates in the in most cases are higher than the top personal tax rates.Corporation pays tax on its income and then pays dividends and shareholder pays tax on the dividend. Even though there is a measure of integration to reduce double taxation, there still remains some double taxation on dividends.