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Q.Why should I form a corporation?

A.The sole proprietorship is merely the alter ego of its owner, and as such it does not exist for either state law or federal income tax purposes. When operating as a sole proprietor, or as a partnership, the business owner(s) will be personally liable for the debts and obligations of the business. In addition, all income earned or losses incurred are taxable directly to the business owner(s) and reported on the individual tax return.

Businesses generally should not be operated as sole proprietorships or partnerships. Why? Because the S-corporation and LLC are generally better alternatives. The S-Corporation offers the pass-through tax treatment afforded to sole proprietors and partnerships without the huge disadvantage of unlimited personal liability for the business debts and obligations. In short, forming a corporation can limit the business owner's personal exposure to the debts, obligations, and potential liabilities of the business.

Before rushing out to form a corporation, the business owner should consult with an attorney to determine: (1) if the limited liability benefit will outweigh the attorney's fees, filing costs, and annual franchise taxes imposed by your state; and (2) whether corporation or limited liability company (LLC) would better fit your particular circumstances. Please beware that failure to properly organize a corporation or LLC can lead to huge penalties at a later date.

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© Copyright 1999-2025 Melissa C. Marsh. All Rights Reserved. All Information on this website is subject to a Disclaimer and Use Agreement. This information is provided as general information only and should not be construed as legal advice. We advise you to seek the advice of competent legal counsel to address your own specific questions, facts and circumstances.