Incorporation is the process of forming a new corporation, be it a business, a non-profit organization or even a city or town government. The main advantage of incorporation is that it can help protect a business owner's personal property from being considered for legal liability claims. There are generally three ways in incorporating a business. Each one has their own advantages and disadvantages.

C Corporation

This is considered as the most common type of business entity. This would be the ideal choice for a business that is trying to attract venture capital as well as public acquisition. A C corporation also allows the business to have an unlimited number of shareholders.

But a disadvantage of putting up a C corporation is that such a business model would need to abide by a lot of formal requirements from the government. C corporations may also be subject to double taxation. The government may require taxation on the corporation's income separately from personal income taxes.

S Corporation

An S corporation is a type of business entity that is taxed under the Subchapter S of Chapter 1 of the Us Internal Revenue Code. The corporation itself do not pay income taxes as an entity. Instead, whatever losses and gains that the corporation makes in a certain period is equally divided among its shareholders. The shareholders themselves must then try to report the income or loss made by the corporation on their individual income tax returns.

One of the disadvantages of an s corporation is that it may also be subjected to the many requirements similar to that of a C corporation. Another is that there is a shareholder limit of up to a hundred people, all of whom should be US citizens.

Limited Liability Company

This form of incorporation is relatively new to the US and have only been made available in recent years. This business entity has the characteristics of both a corporation and a partnership. Distribution of earnings in an LLC is dependent on the shareholders themselves and not solely based on ownership. This is usually more suited for smaller companies and even to those under a single owner.

The advantage of a limited liability company is that it offers the same protection against liability claims as a C corporation but with less of the formal requirements. LLC's are taxed on individual income taxes and is not subjected to taxes as a corporation.

There is no limit to the number of shareholders an LLC may have and may even include non-US citizens. A probable disadvantage of such a corporation is that it is not allowed to go public or issue stock shares. LLC's also may be subjected to self-employment taxes.