The most important advantage of incorporation is that it gives its stockholders limited liability. Since the corporation is a separate legal entity, its stockholders are protected from the debts and liabilities of the corporation.

Factors to consider are the benefits of incorporating (rather than operating your business as a sole proprietorship or partnership) and the implications that incorporating may have on your business. Then you will have to choose between either federal or provincial/territorial incorporation.

The primary disadvantage to incorporation is the possibility of double taxation. The profits of a corporation are taxed first as income to the corporation, then second as income to the shareholder. However, all reasonable business expenses such as salaries and other operating expenses are deductions against corporate income which can minimize double taxation. Double taxation can be eliminated by making an S Corporation election. S Corporations only pay taxes one time at the tax rate of the shareholder(s). S Corporations can deduct the same expenses as a C corporation.

Certain issues are involved when determining the proper state in which to incorporate your business. First, you must consider the costs of incorporating in your home state vs. the costs involved in qualifying as a foreign corporation in another state being considered. Second, you must determine the advantages and disadvantages of each state's corporate laws and tax structure. Generally, it is considered best to incorporate in the state in which your business is operating.