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Learn2 Choose a Business Entity (continued)
Step 2: Understand the advantages of incorporation

There's no single formula to decide if you should turn your business into a corporation. Instead, you must balance several factors. The following are potential advantages:

Protection from debts and other liabilities. As stated previously, incorporating can save investors big money if things go sour, since investors can only lose as much money as they put in. There are certain things, however, that can make investors personally liable if (among other things) bank accounts are co-mingled, proper corporate records aren't kept, or the corporation isn't funded sufficiently at the outset. Sole proprietors and general partners, on the other hand, are still responsible for the debts of their businesses, and their personal assets are vulnerable to seizure.

Added tax deductions. While partnerships and sole proprietorships can deduct certain business expenses from their taxable income, corporations have an even wider choice, including:

Group health insurance plans
Group life insurance up to a specified amount
Certain transportation systems
Employee education and training benefits
Day care for workers with children
Corporate meal plans
Retirement plans
Raising capital. Corporations have an easier time raising capital by selling part ownership (stock), because investors are generally shielded from personal liability. This isn't always true for investors in partnerships (unless it's a limited partnership).

Longevity. Because a corporation is an entity in its own right, it can continue to operate smoothly even if a current investor dies (while the death of a partner or sole proprietor can essentially end the business unless there's a written agreement or more than one partner left in the partnership). If you want your business to outlive you, you might want to consider incorporation.

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Step 1: Understand your options
Step 2: Understand the advantages of incorporation
Step 3: Understand the disadvantages of incorporation
Step 4: Consider the S corporation
Step 5: Understand LLCs
Step 6: Understand sole proprietorships
Step 7: Understand partnerships