Businesses, as they grow, often become corporations (technically called C corporations), identified by an extension to their name: Corp., Inc., or, in Canada, Ltd. A corporation is usually formed by the authority of a state government. The steps to forming a corporation begin with writing incorporation papers and issuing capital stock. Then, approval must be obtained from the secretary of state in the state in which the corporation is being formed. Only then can the corporation act as a legal entity separate from those who own its stock.

Corporate Advantage

The primary advantage to incorporation is that it limits the stockholders' liability to their investments. If you buy $1,000 of stock in a corporation and it fails, you can only lose up to the $1,000 investment. The corporation's creditors cannot come back to you demanding more money. The exception is when you put up some of your own assets as collateral for the corporation.

Ownership of a corporation is a transferable asset. As mentioned earlier, the New York Stock Exchange and other exchanges make a big business out of transferring stock, or partial ownership, in corporations from one investor to another. If your consulting services business is a corporation, you can sell partial ownership or stock in it within certain limits. In fact, this is how many corporations get money to grow. A corporation can also issue long-term bonds to gain the cash required to purchase assets or build the business.

Corporate Structure

Your corporation has a separate and legal existence. Your corporation is not you or anybody else. It is itself. For example, in the case of illness, death, or other cause for loss of a corporate officer or owner, the corporation continues to exist and can do business.

The corporation can also delegate authority to hired managers, although they are often one and the same. Thus you become an employee of the corporation.

Corporations have disadvantages, too. The corporation's state charter may limit the type of business it does to a specific industry or service. However, other states allow broad charters that permit corporations to operate in any legal enterprise.

Corporations face more governmental regulations on all levels — local, state, and federal. That means your business will spend more time and money fulfilling these requirements as a corporation than it would as a proprietorship or a partnership. If your corporate manager is not also a stockholder, he will have less incentive to be efficient than he would if he had a share in your business.

Incorporation Costs

As you can imagine, a corporation is more expensive to form than other types of business. Even if you don't use an attorney, there are forms and fees that will quickly add up. However, an attorney is a good investment when incorporating your consulting services business.

Corporate Taxation

Finally, corporations allow the federal and some state governments to tax income twice: once as a corporate net income and once as it's received by the individual stockholders in the form of salary or dividends. A Sub-Chapter S corporation allows small businesses to tax the business as if it were a sole proprietorship or partnership (no corporate income tax) and pass the tax liability on to the individual stockholders. There are about 2 million Sub-Chapter S corporations in the United States. Recent changes in the law may make it easier to get financing for a Sub-S. Talk with an attorney or accountant about this option.