The main difference between an incorporated business and an unincorporated one is the legal status of the two. There are advantages and disadvantages to both business structures.
Legal Advantages to Incorporating
A significant benefit of incorporating a business is the legal status the company obtains. Once a company becomes officially incorporated, the business owner's personal legal liability is reduced significantly. Corporations are treated as separate stand-alone entities in legal and tax matters, regardless of the number of owners or shareholders the company may have. Incorporated businesses are held accountable for their own financial affairs, so creditors cannot go after the owner's personal resources to settle accounts.
Tax Benefits of Incorporation
A second significant benefit to incorporating is obtaining the tax status of corporations, as the tax liability of a corporation is also separate from that of its owners. Claiming deductions for necessary expenses to conduct business can greatly reduce taxable income for a company because the entity is taxed on profits. Regardless of taxes owed, the responsibility falls to the company and does not trickle down to shareholders.
Financial institutions prefer to lend funds to incorporated companies vs. unincorporated ones, according to the California Society of Certified Public Accountants. One reason is that an incorporated business can issue stock shares if necessary to increase cash flow and service debts. Creditors look at this as an additional financial resource.
Benefits of Remaining Unincorporated
One advantage of an unincorporated business is that the owner doesn't have to deal with the cost and paperwork required to undergo the process of incorporating. Remaining unincorporated also greatly reduces the time and money spent keeping records and reporting to federal and state agencies, as regular reporting is not required to the degree that it is with corporations. In addition, owners and managers of unincorporated businesses do not have to answer to shareholders. The owners control the finances of the company and can do what they choose with profits. Finally, operating an incorporated business takes much more time and money than running an unincorporated one, according to the U.S. Small Business Administration. The SBA calls corporations highly regulated complex organizations better suited for large businesses with numerous employees.
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