Entities

Until now, most investors have been operating as sold or individual proprietorships, they form a business organization which the individual provides the capital, starts and runs the business, and keeps all the net profits and is taxed on them.

As the sole proprietorship, the individual assumes total liability.

One step up in complexity from the sole proprietorship is the partnership, in which two or more people act as joint proprietors: they provide joint funding, joint management, and joint financial responsibility. Unfortunately, like the sole proprietorship, the partners are personally liable to an unlimited degree for all the other partners’ errors.

A corporation is the most sophisticated and protective form of business organization. It is a legal person, completely separate from the individuals who own it and control it.

A corporation has the power to do anything any person may do: carry on business, own property, Loan and borrow money, sue and be sued.

Most important, it offers its shareholders a limited liability: its stockholders can lose no more than their original investment; they are not liable for the debts of the corporation.

In terms of limited exposure to liability alone, it pays to incorporate to protect your assets; if you incorporate, no one can attach your car, house, or other of valuable assets, if your business fails or if you lose a lawsuit. While this point is particularly important in such obvious professions as medicine, dentistry, law, architecture, and the construction industry, there are lesser-known areas in which limited liability plays an important role.

Incorporating to make job possibilities more attractive to new or future employees. There’s a feeling of working for profitable enterprise associated with incorporation; you can offer employees greater benefits out of pretax dollars; and of course you can always offer them a promotion and title instead of a raise.

As wonderful as these possibilities are; Let’s not forget all or many of the amazing deductions that are now applicable to your business deductions such as medical, life and disability insurance benefits.

Incorporation offers you free life and disability insurance. There is even one kind of insurance, you can’t get as a self-employed person but can’t get as the employee of your own corporation, even if you are the only employee — workers compensation.

Medical benefits alone can make it worth your while to incorporate. If you pay your medical bills as a sole proprietor, they now can be deducted from taxable income, which is reduced by 7.5% of your adjusted gross income. For most people, these deductions can wipe out over $5,000 in medical bills every year. But your corporation can write off all your family’s medical bills — they’re considered a business expense.