Incorporated businesses are independent legal entities, while unincorporated businesses are simply extensions of their owners. One of the chief implications of this legal distinction is that owners of unincorporated businesses are generally personally liable for the business’s liabilities, while owners of an incorporated business are generally not liable for the business’s debts. This means that if an unincorporated business runs out of funds, its owners will have to pay any remaining outstanding debts. On the other hand, if an incorporated business runs out of money, its owners are generally not legally required to pay any of its outstanding debts.
Another implication of the relationship between the owner and a business regards how long the business can last. Since unincorporated businesses are essentially extensions of their owners, these organizations have a finite life; each unincorporated business can only last as long as the owners live. On the other hand, an incorporated business is independent and not tied to the life of any person. As a result, an incorporated business, theoretically, could last forever.
Transferability of Interest
Since unincorporated businesses are extensions of the owners, it is difficult to transfer interest in the business to a third party. While an unincorporated owner may be able to share business assets, he is generally unable to sell his interest in the business because the business is legally an extension of himself. On the other hand, since an incorporated business is legally independent, an owner’s interest in the business can easily be transferred without affecting the business itself.
Since unincorporated businesses are not independent, the owners must report their share of the business’s income and losses on their personal returns. On the other hand, incorporated businesses must pay taxes on any income it earns. Then, if it distributes any income to its owners, the owners must pay tax on any cash they receive. As a result, unincorporated business owners are taxed once while an incorporated business owner is taxed twice.