Accounting: Incorporation Pros and Cons
An accountant suggests several considerations for entrepreneurs who are interested in incorporation.
For entrepreneurs who, like Fran Greene (see "Keeping Your Businesses Separate," [Article link]), must decide whether or not to separately incorporate each business venture, Jeffrey Levine, an accountant in Newton, Mass., offers these considerations:
Why keep them separate? Doing so will give you liability protection, sheltering each venture from any creditor or product problems the other may face. Also, it's easier to take either venture public if you've got separate financial records. Executive compensation can be higher, too, because "you'll have a greater chance of convincing the IRS that your total compensation is 'reasonable' if it comes from two different companies."
Sometimes, Levine adds, keeping businesses separate can create what he calls "cash-flow opportunities. This can be complicated," he explains, "but if your businesses really do operate on different financial cycles, you can sometimes play with the timing of your fiscal years to reduce cash-flow pressures."
Why merge into one corporation? Levine explains: "You'll probably pay less for your legal, accounting, and other administrative fees. Corporate insurance costs will probably be lower because of savings from scale. There will be only one administrative cost for any pension, health, or other fringe-benefit plan."
Expect to save in other ways. "Some states charge a minimum tax, whether a company is profitable or not. So by merging a less profitable venture with a more profitable one, you can usually cut your taxes."
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