Advantage of incorporating

There are many advantages of forming a corporation. The first advantage of incorporating is limited liability. This advantage of incorporating is what first attracts business owners to incorporate.

First advantage of incorporating: limited personal liability

Like the owners of a limited liability company ( LLC ) or the limited partners in a limited partnership, the owners (shareholders) of a corporation are not personally liable for business debts, claims or other liabilities. This means that a person who invests in a corporation (i.e. a shareholder) normally stands to lose only the amount of money or the value of the property that he has paid for its stock.

As a result, if the corporation does not succeed and cannot pay its debts or other financial obligations, creditors cannot seize or sell the corporate investor's home, car or other personal assets.

Separate tax legal entity

A corporation is a separate tax entity, distinct from the owners of the corporation. This means that the corporation is taxed on all profits that it cannot deduct as business expenses. This separate entity tax treatment brings many advantages of incorporating to a corporation.

For example, an advantage of incorporating is that a corporation permits income splitting between the corporation and its owners. A corporation allows the owners to be classified as "employees" of their own business, making them eligible to receive tax deductible employee fringe benefits.

Corporate tax treatment

Because a corporation is a separate tax payer, the corporation has its own corporate income tax rates and files its own tax returns, separate from the tax rates and tax returns of its owners. This double layer of taxation allows corporate profits to be kept in the business and taxed at corporate tax rates, which are often lower than those of the corporation's owners.

Being able to pay coporate income tax instead of personal income tax, one advantage of incorporating is that a corporation can enable its owners to save on taxes. This compares to the pass through taxation that is standard for sole proprietorships, partnerships and LLC or limited liability company.