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Start off right: The importance of business incorporation

When you have an incredible idea for a business, service or product, it is completely natural to want to move quickly to make that idea into a money-generating reality. Many people who want to start their own business focus on the smaller details, like packaging and naming products, rather than the legal technicalities involved with forming and operating a business.

Whether you intend to own and operate the business on your own or you plan to partner with investors, you should take some time to consider your options. For many small and medium-sized business owners, a sole ownership or partnership may be all that you need to begin business operations. However, if you anticipate any kind of liability or financial risk, it may be in your best interests to seriously consider forming a corporation.

What is a corporation?

At its most basic, a corporation is a legal entity that receives the same rights as a person in the United States. Creating a corporation is one way of officially starting a business. It is also an ideal way to protect yourself from the legal and financial liabilities involved in operating a business.

If, for example, your business were to fail, in many cases, you, as the owner, could end up liable for any debts incurred by your business. That could put your personal assets, from your home to your retirement account, at risk. Creating a corporation, on the other hand, allows for an additional degree of protection. So long as there is no commingling of personal and business assets, you, as an individual, will not have to worry about business debts. A corporation can also protect you, as an individual, from liability in any lawsuits that seek compensation from your business.

There are several kinds of corporations

The most common form of corporation for smaller businesses is the limited liability company or LLC. An LLC offers protection from personal liability when it comes to business issues, debts and other problems. However, in some cases, a person who owns and operates an LLC can end up accountable for issues related to the business. Of course, the same is true of more complex corporations as well.

Many businesses in Pennsylvania become either a "C" or an "S" corporation. In order to create a corporation like this, it is necessary to file Articles of Incorporation with the state. Shareholders become the owners of the business. Any income is subject to taxation before it gets passed on to shareholders. An "S" corporation differs in that there are limits on how many shareholders can have a stake in the company. However, taxation is different for "S" corporations. Profits are passed on to shareholders, who must then pay individual taxes on that income.

Determining which of these forms is right for your business is a critical first step to taking your company from a dream to a reality.

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